Middle Class Tax Hikes: Political Rhetoric vs. Economic Reality

Scott Lincicome

Political rhetoric:

Dylan Matthews

Would lowering the 6 percent [payroll tax] rate but extending it to higher incomes (up to $50,000 or $100,000, or what have you) violate Joe Biden’s pledge to not raise taxes on couples earning under $400,000? The tax is formally paid by businesses; does that make the individual tax pledge by Biden not applicable?

Ron Wyden

Yeah, we don’t think that’s applicable, because [the] $400,000 [pledge] is on the individual side.

Economic reality:

[F]or the payroll tax, virtually all applied incidence studies assume that both the employee share and the employer share are borne by the employee (through a fall in the net wage by the full amount of payroll tax). This assumption has been tested and confirmed repeatedly, going back to Brittain (1971) who used a 1958 cross‐​section of 13 industries in 64 nations and found full burdens on labor. Gruber (1997) reviews other more recent empirical studies that use both cross‐​section and time‐​series data, consistently finding full burdens on labor. Gruber (1997) himself uses data from a survey of manufacturing plants in Chile over the 1979–86 period to estimate the effects of dramatic 1981 cuts in that country’s payroll tax, and finds that “the reduced costs of payroll taxation to firms appear to have been fully passed on to workers in the form of higher wages …”

For more on the reality of who really pays payroll taxes or corporate taxes or tariffs (aka “incidence”), click on the links provided.