[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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