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November 2011
Payroll and Capital Gains Taxes Not Working For Our Economy
By John Paul Galles

     If we really want get people back to work, we need to eliminate payroll taxes. They are the most substantial roadblock to hiring in this current economy. Payroll taxes are those taxes on employment to the employee and to the employer that include Social Security and Medicare/disability also known as the Federal Insurance Contributions Act or FICA.

     The Social Security Act was signed into law in 1935, the first taxes collected in 1937, and the first benefits were paid in 1940. The first taxes imposed were 1% on the employer and 1% on the employee on the first $3,000 of income. That remained in place from 1937 to 1949.

     Medicare was passed into law in 1965. Cost of living allowances were added by law in 1972 and began to be paid in 1975. Until this year, payroll tax rates have been set at 7.65% for both employer and employee or 15.3%. This rate is imposed on taxable earnings up to $106,800 for Social Security and higher for Medicare.

     When payroll taxes were first imposed, there were more than 40 workers for every beneficiary or retiree. By 1960, the ratio had fallen to about 5 workers per every retiree. By 1990, the ratio was about 3.4 workers per retiree, and in 2010, 2.9 workers per retiree. There were about 58 million workers in 1951 and in 2008 there are about 162 million. The total population is now stands at 312 million and the number over 65 years old is above 40 million and growing rapidly.

     When social security was first created, individuals in the United States were expected to live on average to about 63 years old. In 1960, life expectancy had increased to nearly 68. In 1990, it had reached almost 73, and by 2004, it was slotted at 75.7 years.

     We have clearly reached the point in time when our obligations are now higher than the revenues we collect from payroll taxes. While there is no doubt that revenues and expenditures need to be in balance, it is wrong to rely on payroll taxes alone to finance Social Security and Medicare.

     During the same historical tracking period, 1937 to 2010, capital gains tax rates have fallen from a high of 39% to its current low of 15%. Until recently, the reduction in the capital gains tax was justified as a stimulus for job creation when investors finance job-creating enterprises. That was thought to work for many years as the U.S. economy generated jobs year after year until 2000.

     However, job creation seems to have been supplanted by wealth creation. Recent economic reports from the Economic Policy Institute indicate that over 80% of the wealth gains over the past 25 years have gone to the top 5% of households. Recent evidence from a study by Deloitte regarding mid-sized businesses suggests that businesses are choosing to invest in technology rather than new jobs. We have also learned that non-financial S&P 500 companies recently reported holdings of $837 billion, up 26% from $665 billion one year ago.

     The incentive of low taxes on capital gains for stimulating job creation seems to have been stymied by people and companies fearing the economic climate and choosing instead to “hoard” what they have until an economic recovery seems more likely.

     It was 1987 when President Reagan and Ways and Means Chairman Dan Rostenkowski reached their agreement on the last major tax reform. In the intervening 25 years, lobbyists and special interests have hacked away from that reform to put in place their own corporate tax advantages.

     Our national economy has become a global economy. It is time for substantial tax reform. The debate has begun. If we really want to create jobs, payroll taxes need to be eliminated. We need to encourage investment in people and the development of a highly skilled and talented workforce to keep America great. We have much work to do to compete successfully.

John Paul Galles is the publisher of Greater Charlotte Biz.
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