[Congressional Record Volume 142, Number 135 (Thursday, September 26, 1996)]
[Senate]
[Pages S11410-S11411]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




         PAYROLL TAX CREDIT PORTION OF THE USA TAX ACT OF 1995

  Mr. NUNN. Mr. President, I rise today to discuss, again, another 
subject, the unlimited savings allowance tax legislation, USA tax, that 
Senators Domenici, Kerrey, Bennett, Dodd, and I have cosponsored. I 
note the Senator, one of the great cosponsors here, Senator Bennett, is 
in the chair today.
  In previous remarks to the Senate, I addressed the issue of broader 
tax reform, which I will not repeat today, and, in particular, the need 
to make a careful review on the various tax reform proposals on an 
apples-to-apples basis rather than what has been done so far, which is 
basically comparing apples to oranges.
  Today, I would like to address what I believe would be a critical 
component and what should be a critical component of any broad tax 
reform effort. That is integration of the income tax and the Social 
Security payroll tax.
  Mr. President, the USA tax plan contains the most comprehensive 
solution to this issue of any tax reform proposal on the table in the 
form of a payroll tax. I believe no matter what emerges in tax reform, 
which I hope will be next year, I believe this payroll tax credit 
should be a central feature of that proposal. Certainly, it is a 
central feature and one of the strongest points in the USA tax 
proposal.
  Mr. President, for individuals under the USA system, all income, 
regardless of source, forms the individual tax base. Unlike today's 
Income Tax Code, which is concerned about distinguishing the source of 
income, the USA tax proposal is more concerned about the use of that 
income. If your income is saved, your tax on that income is deferred. 
When your income is consumed, then it is taxed. In other words, you 
deduct your savings. From this broader

[[Page S11411]]

income tax base, the USA tax proposal provides a limited number of 
deductions, including net new savings, a family living allowance, 
higher education expenses, home mortgage interest, charitable 
contributions, and alimony.
  After these deductions are made from gross income, a taxpayer would 
determine the amount of tax by applying progressive graduated rates to 
his or her taxable income. Once this calculation is made, which 
determines the total Federal income tax liability, the taxpayer would 
then subtract dollar for dollar from the income tax the amount withheld 
from your salary for the employee share of the Social Security payroll, 
or FICA tax. In other words, the amount paid in by the employee to the 
FICA tax, Social Security tax, is credited against income tax. It is 
credited dollar for dollar.
  This payroll tax credit is an essential part of the USA tax system. 
It would reduce the regressive nature of the present payroll tax. It 
would reduce the disincentive to hire lower wage workers. This tax 
credit would be refundable so that if you had more withheld in payroll 
taxes than you owed in income taxes, as is the case for many people, 
the difference would be refunded to the taxpayer.
  I believe my colleague would find it interesting that roughly 80 
percent of Americans today pay more in non-income taxes than they do in 
income taxes. Payroll taxes make up the vast majority of non-income 
taxes.
  We spend all of our time debating income tax. What that means is we 
hear from people in higher income groups, but the average American in 
today's society, 80 percent of Americans, pay more in non-income taxes 
than they do in income taxes. I hope that part of the debate will begin 
because it is long overdue.

  Therefore, people with earned income, under our proposal, can, in 
effect, subtract 7.65 percent--the amount of pay withheld for the 
employee share of the Social Security-Medicare payroll taxes--from the 
USA tax base before the rates are applied. Thus, a 20 percent tax rate 
under the USA system is, in effect, equal to a marginal rate of 12.35 
percent under today's system after you take into account the payroll 
tax credit.
  Our proposal is often criticized because it has a 40 percent tax 
bracket. The first thing people ignore is that that is on assumed 
income. You have a right to deduct your savings before that rate is 
applied to a tax base. The second thing people overlook is you have to 
subtract the 7.65 percent from the 40 percent to get our effective tax 
rate because there is a credit back for the Social Security taxes paid. 
That is enormously important. If you are in a lower bracket, you would 
still subtract that.
  The payroll tax is a perfect example of why fundamental tax reform is 
needed. As my colleague from New York, the ranking member of the 
Finance Committee, Senator Moynihan, has so frequently and eloquently 
pointed out, the payroll tax is a very regressive tax. It discourages 
the hiring of additional workers, especially low-wage workers.
  Nobody designed the system that way, of course. The payroll tax 
started out at a low rate, but that rate has grown considerably over 
the years. In 1950, the payroll tax was 1.5 percent of wage income. By 
1960, it had grown to 3 percent of wage income. In 1970, it had risen 
to 4.8 percent of wage income. By 1980, it was 6.13 percent. By 1990, 
it had risen to 7.65 percent, where it remains today.
  I repeat, Mr. President, 80 percent of the American people pay in 
non-income tax more than income tax. Of course, if you included the 
employer share, all of the percentages would be doubled. To state it 
another way, from 1960 to 1990, the Social Security tax has gone from 2 
percent of our national income, or GNP, to 5 percent of our GNP. By 
comparison, receipts from individual income taxes have grown only 
slightly, from 8.1 percent to 8.5 percent over this same 30-year 
period.
  Part of the reason for the increase in the payroll tax is due to 
fewer workers supporting a growing number of retirees. Another reason 
is that during the late 1960s and early 1970s the payroll tax working 
people paid grew considerably to finance large cost of living increases 
for retirees that were enacted in years of high inflation. Then in the 
late 1970s and early 1980s, payroll taxes increased again, ostensibly 
to build up a surplus for the retirement of the baby boomers. 
Unfortunately, as Senator Moynihan has also pointed out, that is not 
what the surpluses are actually being used for. These surpluses are 
being used to finance Government spending and to mask the true size of 
the annual Federal deficit.
  So we now find ourselves with a combined employer-employee payroll 
tax rate of 15.3 percent--a very high rate that adds significantly to 
the cost of labor. We set up a system for one purpose--to provide 
income security in retirement--that is actually hurting working people 
in ways that I am sure were never intended.
  Our proposal does not abolish the payroll tax. It does not affect the 
operation of the Social Security System in any way. What it does 
attempt to do is to offset the negative, unintended, effects of the 
payroll tax by crediting the payroll tax against an individual or 
business's tax liability under the USA tax. Employees get a credit for 
their FICA tax against their individual income tax. Employers get a 
credit for their share against the business tax. So the same amount of 
revenue will continue to be deposited in the Social Security trust 
fund. But the payroll tax will now be integrated into the income tax in 
a way that offsets its regressive nature.
  I know many tax reform proponents are now agreeing with the 
underlying wisdom of our payroll tax credit. The Kemp Tax Commission, 
led by the small business elements, recognized this fact and called for 
a payroll tax deduction in its recommendations. This deduction is a 
step in the right direction, a tax credit is a far better solution. I 
am hopeful that as others begin looking at components of sustainable 
tax reform they will reach a similar conclusion about the necessity of 
payroll tax credits.
  Mr. BYRD addressed the Chair.
  The PRESIDING OFFICER. The Senator from West Virginia.

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