Fixing Social Security and Encouraging Growth

May 17, 2005

Representative Robert Wexler (D) of Florida announced his plan to save Social Security yesterday. Mr. Wexler proposes to raise the payroll tax by 6 percent. According to the Associated Press story:

Mr. Wexler’s bill calls for a 6 percent tax on all income above the current $90,000 cap. Three percent would be paid by workers and 3 percent paid by their employer.

An expansion of the already existing payroll tax is poor tax policy from an economic perspective. A payroll tax is a direct tax on labor, especially since it is levied on both the worker and the employer. Essentially, the payroll tax makes it more expensive for businesses to hire workers, and lessens the reward for participating in the labor market for individuals. The result is a smaller labor force. Economists understand this phenomenon as “the more something is taxed, the less of it there is”.

A smaller labor force is detrimental to economic growth; therefore Congress should concentrate on plans to fix Social Security which modernize the system and encourage growth of the economy. Increasing the payroll tax does neither. See the Tax Foundation’s Fiscal Fact on Social Security to learn more about ways to bring Social Security into the 21st century.

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