What If Congress Raised Taxes And Nobody Cared — Or Even Noticed?

Joseph Thorndike, Forbes Contributor

Two years ago, Congress raised taxes on almost every working American – and nobody cared. In fact, a lot of people didn’t even notice. That tells us something important about the way Americans view taxes. But it also tells us something important about how we collect them.

In 2011 and 2012, Congress cut the Social Security payroll tax by two points. More specifically, lawmakers reduced the portion of the tax levied on employees from 6.2% of taxable wages to 4.2%. (The portion paid by employers remained at 6.2%; most economists believe that this other half of the tax is also ultimately borne by workers in the form of lower wages.)

The payroll tax cut was explicitly designed to be temporary – a one-year shot in the arm for the struggling economy. After a year, lawmakers agreed to extend the cut for another 12 months. But on January 1, 2013, the payroll cut expired, and workers began paying the full 6.2% again.

And hardly anybody noticed.

Asked in early 2013 whether their payroll taxes had changed, 55.6% of respondents to a Google Consumer Survey said they didn’t know. Only 28.9% had actually noticed the increase. (To round things out, 8.3% said the tax had remained the same and 7.1% thought it had fallen.)

Dean Baker of the Center for Economic and Policy Research, which commissioned the survey, found these results illuminating. “Let’s face it,” he said. “The public cannot be too upset by tax increases if they don’t even notice when they take place.” Baker suggested that the poll results might even point the way toward a long-term fix for the (eventual) shortfall in the Social Security funding:

These survey results suggest that the public may not be especially adverse to a modest increase in the payroll tax, since they may not even notice it. This supports the findings of other polls that indicate that most Americans favor strengthening Social Security through revenue increases, such as raising the payroll tax rate or the cap on taxable wages.

Baker is probably right. As he noted, the 2013 tax increase was especially dramatic, implemented in a single large jump rather than a series of small increases. If that sort of hike didn’t raise hackles, then smaller, phased-in increases would probably be even less controversial.

In addition, the payroll tax has always been relatively well tolerated by Americans. In surveys asking Americans to rank various levies by their desirability, the payroll tax places near the middle of the pack – below “sin taxes” on alcohol and tobacco but above property, sales, and individual income taxes. (For a great roundup of popular opinion on taxes, take a look at the American Enterprise Institute’s “Public Opinion on Taxes: 1937 to Today.”)

The relative popularity of the Social Security tax probably derives from the popularity of Social Security benefits. Unlike most elements of the federal tax system (and especially unlike other big-money revenue raisers), the payroll tax makes a clear connection between taxes paid and benefits received. Indeed, that tight connection leads some people to view the payroll tax (incorrectly, in my view) as a sort of insurance premium.

But there’s another element of the payroll tax that also contributes to its popularity — its invisibility. For most people, the tax is automatically withheld rather than consciously paid. That’s no small thing. Withholding makes taxpaying a lot less painful – as anyone who makes estimated tax payments can readily attest. When you have to sit down and write the government a check every quarter, you start paying attention to the cost of government – and who’s paying for it.

Small-government conservatives are well aware of this. Mark C. Schug, an emeritus professor at the University of Wisconsin-Milwaukee, recently made the case for abolishing withholding entirely (he focuses on individual income taxes, but the argument applies equally well to the Social Security levy).

When people have their taxes withheld from their paychecks, Schug wrote for The Hill, they’re less inclined to get mad about paying them. And that leads to passivity and (eventually) the inexorable growth of government:

Taxpayers are inclined to look at the bottom line and pay little attention to how much of their salary or wages are actually taken by government. It’s like money they never saw. The pain comes in one or two drops at a time – not in a torrent each quarter.

Schug argued for keeping taxpayers on the hot seat. “Once people see how much they actually owe the government each quarter, there will be a tax rebellion that will make the Tea Party look like child’s play,” he predicted.

That’s almost certainly true. But it’s also true that withholding is not going away. It’s a fundamental element of the American state – and a key explanation for its growth. And while that makes it a tempting target for anti-state ideologues, it also makes it entirely secure.

http://www.forbes.com/sites/taxanalysts/2014/10/24/what-if-congress-raised-taxes-and-nobody-cared-or-even-noticed/

Invisible taxes are the life blood of the Tax – Spend – Regulate members of our society that abhor the liberties enumerated in our Declaration of Independence and Guaranteed by our Constitution.

The T – S – R’s
more likely than not represent approximately 70-80% of the Democratic Party and 20-30% of the Republican Party and 0% of the Libertarian Party.

What is a fair tax structure? The T-S-Rs have no limit. The Reader’s Digest once published a poll on this. It came back as the total tax structure for a combination of the Federal, State and local taxes should never exceed 25% of your earnings. That was in the ERA of a marginal tax rate of 91%. I asked one of my patients who always felt that the rich should pay more. It looks like you think the rich can pay 100%? He said “absolutely.” I then asked him if he thought the rich should pay 200%? He said “absolutely.” So there will never be a limit that the T-S-Rs will accept. So we have to have a Constitutional Amendment to limit taxes.

How about each level of government having a limit of two taxes? The Feds could have an income tax of 15% and an excise tax on interstate and import commerce of 10%.

How about giving the states a 5% income tax limit and a 5% sales tax limit?

How about giving the city and local government a 1% property tax and 5% sales tax limit?

I know that’s more total than the 25% poll from Reader’s Digest of yesteryear? But wouldn’t that be a good start and maybe a good ending also?

State after state would approve this. It may have to start in the states and thus work back to the Feds which would then have to abide by it.

Any comments? Send to medicaltuesday@earthlink.net

Feedback . . .
Subscribe MedicalTuesday . . .
Subscribe HealthPlanUSA . . .