The Changing Importance of Income and Payroll Taxes on U.S. Families

Abstract

Nearly two-thirds of U.S. families currently pay more in payroll taxes than they pay in federal personal income taxes. In the lower strata of the family income distribution, payroll taxes exceed income taxes for nearly 90 percent of all tax-paying families. This paper documents the relative magnitude of income and payroll tax burdens on families of different types. It considers the differential importance of these taxes for married couples, single individuals, and single-parent families. The paper considers total tax payments as well as the marginal payroll and personal income tax rates facing families, and presents an exploratory analysis of how taking account of "tax benefit linkage" alters relative marginal payroll and income tax rates. The percentage of families for whom the marginal payroll tax rate exceeds the marginal personal income tax rate falls from 54 percent to 9 percent when the effective payroll tax rate is measured net of the present discounted value of future social security benefits.