Payroll Taxes in the Finance of Social Security

Abstract

Payroll taxes have been widely portrayed in Canada by the media, business leaders, policy advisors, and even at the highest levels of the political hierarchy as “job killers.” In some of the more extreme rhetoric, Finance Minister Paul Martin asserted that “...there is nothing more ludicrous than a tax on hiring. But that’s what high payroll taxes are” (Canada Department of Finance, 1994b, 7).1 This view raises critical questions about the use of payroll taxes in general and in the finance of social security programs: Are payroll taxes guilty as charged, in whole or in part, of harming employment? If increased payroll tax rates have killed jobs and discouraged job creation, would cutting their rates yield large and enduring employment gains? Are there ways to restructure payroll taxes and the associated social security benefits so as to minimize any disadvantages or maximize any advantages of these taxes? Are there available other, more attractive and feasible, means of financing social security programs? If payroll taxes are undesirable and alternative means of financing limited, must our social programs themselves be cut back?