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Now You See It...

Payroll tax is likely the tax you most want to have cut, but will it ever happen?

Congress is debating $350 billion in new tax cuts. But if you're holding your breath for a cut in payroll taxes, you might as well exhale. The payroll tax has been called the "ignored tax," because it never gets cut. Payroll taxes make up 34.9 percent of federal revenues and are expected to increase to 36.3 percent of federal revenues by 2004, according to the Tax Policy Center, a nonprofit, nonpartisan group that studies tax policy. Payroll taxes currently constitute 15.3 percent of payroll in employee and employer contributions combined.

Entrepreneurs indicate in surveys that the payroll tax is their greatest obstacle to business and job expansion, says Robert J. Walker, president of Get America Working!, a bipartisan employment policy group in Arlington, Virginia. "Cutting the payroll tax by 10 percent would increase employment 3 percent in the short term," he says. "That's a lot of jobs."

So what's the holdup? Payroll taxes fund Medicare and Social Security, two entitlement programs that are sacred-not to mention political hot potatoes. "No one wants to be left open to the charge that they don't care about the solvency of the Social Security system," says Dennis Cohen, chair of tax and tax litigation departments at law firm Cozen O'Connor in Washington, DC. Nor is the government eager to lose the reliable revenue the payroll tax generates, particularly in a renewed period of deficit spending.

With the next presidential election 15 months away, however, politicians will be under increasing pressure to reinvigorate the economy. Could a payroll tax cut play a role? Presidential candidate Sen. John Kerry (D-MA) is pushing for a "payroll tax holiday," and Sen. John McCain (R-AZ) is mentioning the need for payroll tax cuts to help small business.

But Hank Gutman, partner in charge of federal tax and legislative and regulatory services for accounting and tax services firm KPMG LLP in Washington, DC, believes there won't be a permanent change in the payroll tax until there's a willingness to redefine the scope of the federal government's obligation to retirees.

This story appears in the August 2003 issue of Entrepreneur. Subscribe »