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Two-Thirds of Tax Units Pay More Payroll Tax Than Income Tax

Leonard E. Burman, Greg Leiserson

Published: April 09, 2007
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The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.


Abstract

April 15 is synonymous with taxes in the United States, but most Americans actually pay more payroll taxes than federal income taxes. In 2006 workers and employers each paid 6.2 percent Social Security tax on the first $94,200 of earnings and 1.45 percent Medicare tax on all wages. While the statutory obligation to pay payroll taxes is split evenly between workers and employers, most economists believe that the employer tax usually translates into lower wages, so workers bear the full burden of the tax. Thus, the total payroll tax rate equals 15.3 percent of earnings for most workers.


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Two-Thirds of Tax Units Pay More Payroll Tax Than Income Tax

April 15 is synonymous with taxes in the United States, but most Americans actually pay more payroll taxes than federal income taxes. In 2006 workers and employers each paid 6.2 percent Social Security tax on the first $94,200 of earnings and 1.45 percent Medicare tax on all wages. While the statutory obligation to pay payroll taxes is split evenly between workers and employers, most economists believe that the employer tax usually translates into lower wages, so workers bear the full burden of the tax. Thus, the total payroll tax rate equals 15.3 percent of earnings for most workers.

About two-thirds of taxpayers owed more payroll taxes (including the employer portion) than individual income taxes in 2006. Many households (including most retirees) do not have any wage income and thus pay no payroll tax. Among households with wage earners, 86 percent have higher payroll taxes than income taxes, including almost all of those with incomes less than $40,000 and 94 percent of those with incomes less than $100,000. If only the employee portion of payroll taxes is considered, 44 percent of taxpayers and 56 percent of wage earners pay more payroll tax than income tax, including nearly 80 percent of earners with incomes less than $50,000.

The payroll tax is very regressive with respect to current income: The average tax rate falls as income rises. The income tax, in contrast, is progressive. The regressivity of the payroll tax is mitigated to a substantial extent when Social Security and Medicare benefits are considered as well (not shown).

The complete article is available in PDF format.