Blog author: eschansberg
by on Wednesday, April 15, 2009

Just in time for April 1st and April 15th, let’s talk about taxes.

On April 1st, the excise tax on cigarettes was increased dramatically—from $.39 to $1.01 per pack. It’s fitting that this occurred on April Fools’ Day, since it served to break President Obama’s campaign pledge not to increase “any form of” taxes on any family making less than $250,000 per year.

Independent of breaking a campaign promise, such a tax is attractive for non-smokers since the costs are imposed on other people and it reduces a harmful behavior.

But the tax is troubling on several levels. First, what are the limits to the government’s paternalism in the consumption of a legal product? Second, to the extent that people reduce their smoking, this will undermine state tax revenues based on tobacco (by an estimated $1 billion)—in a time of already strained budgets. Third, taxes reduce economic activity and jobs, by definition—not a good idea during a recession.

But I want to focus on one final aspect: since smokers are disproportionately low-income, is it fair to increase taxes in such a regressive manner on the poor? And if Democrats are seen as defenders of the poor, why are they increasing their taxes? These are great questions—and ones that should be asked more often, because the government imposes all sorts of taxes on the poor.

Many of these burdens are indirect. Corporate income taxes are borne by consumers as higher prices; property taxes are borne by tenants as higher rent. Environmental regulations and “card-check” legislation would increase costs for firms and thus, increase prices for consumers and drive away jobs overseas. A wide variety of trade restrictions on food and clothing serve to dramatically increase the basic costs of living.

But here’s the biggie: federal payroll taxes. Lower-income families rarely pay any significant federal “income tax”—the tax on income that we celebrate on April 15th. And they face modest state and county income taxes. Meanwhile, they’re hammered by the 15.3% federal payroll tax on income. Every dollar earned by the lower and middle classes is exposed to payroll taxes; there are no deductions or exemptions.

A family at the poverty line is nowhere near paying federal income taxes—and in many states, will not pay state income taxes either. (Unfortunately, a working poor family in Indiana pays hundreds of dollars per year.) Even an upper-middle income family like mine loses more than twice as much money to federal payroll taxes—compared to federal, state, and county income taxes combined!

It’s amazing that payroll taxes receive so little attention given the staggering burden they place on workers, especially those in the lower and middle classes. Why are they ignored? Two reasons. First, half of their burden is hidden as the employer’s share of the tax. (Don’t be fooled; we pay that half too—in the form of lower wages and compensation. Do you think gas stations pay the gas tax for you?) Second, because it is withheld from our paychecks and we never file a 1040, we tend to overlook it, despite its amazing bulk.

This April 15th, feel free to toss a few choice words at the Tax Man. But make sure to spend some time looking at your pay stub and thinking about payroll taxes.