Options for Avoiding the Payroll Tax

On a few occasions at The Picket Line I’ve mentioned the “payroll tax” — which is distinct from the federal income tax and is ostensibly used to fund Social Security and Medicare, with the money kept distinct from the general fund which is funded primarily by income tax and pays for just about everything else the federal government does.

The payroll tax is much harder to get out of than the income tax is, since there aren’t personal exemptions, deductions, credits or really anything else — you’re taxed from dollar #1 of your earnings on up to about dollar #85,000. After that, your dollars are no longer subject to the payroll tax, which is one reason why some people complain that it’s a regressive tax — one that hits poorer people harder than richer people. (Another reason: the payroll tax only taxes wages, not capital gains, interest, dividends, and other such sources of income that are more common to the rich.)

One would never know it from all the partisan skirmishes over income tax cuts, but more than 79 percent of U.S. families now pay more in payroll taxes than in federal income taxes. Although payroll taxes — listed as “FICA” on paychecks — are split between employers and employees, most economists agree that the full 15.3% burden ultimately falls on workers, through reduced wages or benefits. There are actually two distinct payroll taxes: a 12.4% one to fund Social Security, and a 2.9% one to fund Medicare.

While income tax rates have declined for most families in recent decades, payroll taxes have increased dramatically. , the percentage of government revenue derived from payroll taxes went up from 12 to 33. In other words, Congress has quietly legislated a fundamental shift toward payroll taxes over ; these now provide nearly as much federal revenue ($506.8 b) as the income tax ($737.5 b).

I don’t mention this tax much here, but this is mostly because there isn’t an easy way out of it, the way there is for the federal income tax. The idea that your payroll tax only goes to benefits like Social Security and Medicare and so isn’t as bad as your income tax (which goes to more nefarious government programs) isn’t entirely convincing. Politicians didn’t waste much time licking their chops over this big pile of money before they figured out ways to grab handfuls of it to pay for things it was never intended for.

And, naturally, these programs accumulate the sort of absurd waste that is common to everything the government touches. For instance, you’d think that Medicare, being a government monopoly whose clients don’t have any choice of competitors — or even a choice to withdraw from the program — wouldn’t need an advertising campaign. You’d be wrong. This year, the Medicare program is spending $30 million on advertising, including $600,000 to have the Medicare blimp fly over sporting events.

There are ways to get out of the payroll tax. You can stop earning wages, for one — if you can figure out a way to make a living off of some other source of income. You can work in the underground economy, or work as an independent contractor and simply (illegally) refuse to pay those taxes. Or you can be a member of a religious group that is conscientiously opposed to insurance (for instance because “god will provide”), that supports its dependent members, and that has existed continuously . The Amish are an example of such a religious group; I’m not sure which other ones qualify.

There’s an interesting article up at the Americans for Tax Reform web site that was written a few years back. It tries to show how much of the cost of things you buy is really the cost of taxes. This is a tough calculation, and I don’t really know the methodology behind their numbers, but they conclude:

“The producer in each case must use what you pay for the product for a heavy tax burden as well, including federal, state and local income taxes, payroll taxes, property taxes, use taxes, sales taxes, unemployment insurance taxes, workmen’s compensation taxes, corporate franchise taxes, import fees, and others. In fact, 30 different taxes are imposed on the production and sale of a loaf of bread. The government imposes at least 43 taxes on the production and sale of a gallon of gas. This is just another part of the excessive burden of taxes working people must bear. Overall, about 40 percent of what working people earn ends up going to taxes rather than for their own families. The average family pays more for taxes today than for food, clothing, and shelter combined.”