As the effective income tax rate has lessened, the payroll tax is an increasingly large share of the median American family’s tax bill and thus has become increasingly salient to many Americans. The chart, constructed from Congressional Budget Office data, shows how taxes have changed in the past few decades for the middle quintile of American households (i.e., those are between the 40th and 60th income level). In 1979, payroll and income taxes were about the same percentage of the median family’s tax burden. Now the payroll tax is approaching 70 percent of the median family’s tax burden and the income tax is closer to 20 percent.
Not only is the payroll tax increasingly meaningful to many Americans, the payroll tax rate has a very direct impact on the U.S. economy; the chief economist for Moody’s predicts that returning payroll taxes to 6.2 percent for employees and employers would shave about 1.7% percent off of GDP. The current payroll tax deduction provides about an additional $1,000 per median American family; the proposed payroll tax deduction would provide 50 percent more, or $1,500 per median American family. Since most American families do not have excess income right now, they would spend much of the extra money stimulating the economy.