I see a lot of focus from young, working voters on the income tax implications of Bernie Sanders’ platform. Low-earning, vulnerable Bernie voters are in for a surprise on their paychecks, though, and it’s not the income tax. Sanders tax plan includes pre-packaged Republican talking points: a new tax on people who work for a living, and a big tax increase that businesses only ever pay if they hire an American worker.
If you’re a W-2 employee, the Federal government collects taxes on your paycheck from both you and your employer. Your employer pays 7.65% FICA tax. You pay an equivalent tax, and then Federal income taxes. For low-income earners, payroll taxes are a far bigger chunk of their tax bill. Since they have flat rates, they hit low-earners with less disposable income the hardest. George W. Bush famously campaigned on the “marriage penalty” of differing brackets for single and married filers. Payroll taxes are the “working-class penalty”.
Take a worker, Sally, who works full-time, 40 hours per week, all year, earning the federal minimum wage. She makes $15,080 per year. Thanks to the standard deduction, her “10%” federal income tax bill is $878. However, her 7.65%, no-deductions-allowed payroll tax is $1,154, and Sally’s employer pays $1,154 for hiring her.
Sanders’ Working-Class Tax Bite
Sanders proposes raising the payroll tax on employees by 2.2%, to pay for his “Medicare for All” plan. The government would take an additional 16 cents an hour from Sally under Sanders’ plan. That’s 28% increase her annual tax bill, or $332 a year. Sally would be eligible for “Medicare for All”, but she’s already eligible for Medicaid if she lives in one of the states that expanded the program. Even if she doesn’t, Sanders’ 2.2% tax exceeds the 2% cap on insurance premiums the poorest workers face on an Affordable Care Act exchange before subsidies kick in. The poorest workers would pay more tax money, in return for nothing.
Business Payroll Tax Hike = More Unemployment and Smaller Paychecks for Workers
Sanders’ proposed 6.2% business-side payroll tax hike would add 45 cents per hour to the cost of a minimum wage worker. The 70 cent minimum wage hike in 2009 eliminated about 500,000 overall jobs, adding 1/2% to unemployment. That blow was reduced by the surviving workers’ increased spending adding to hiring up the wage ladder. CBO unsurprisingly estimates minimum-wage workers fare the worst in unemployment impact when their costs go up.
The tax’s impact on low-wage workers’ employment could exceed 2009. There’s no expected boost to consumer spending to offset rising labor costs. People up the ladder, who benefit from minimum wage hikes, won’t here, as Sanders’ tax increase would hit them too. Employers would be incentivized to 1099-ize or outsource their workforces to dodge payroll taxes.
Payroll taxes allow Sanders to appear “pay for” social handouts, hiding the shortfalls that result from poor economic effects: more layoffs, automation, outsourcing, and 1099-ers. The small income tax increases under the Sanders plan show where the real burden will go. If you’re a wage-earner, incomplete understanding of Sanders’ policies is at your own peril.