In recent years, governments worldwide have been exploring new ways to address tax-related issues.
For example, the French government, which reported a budget deficit of approximately 3% of its GDP, has proposed using the surplus tax revenues to exempt minimum wage employees working for small businesses from payroll taxes.
This approach contrasts with the United States, where the government has opted to retain the excess tax revenues collected.
This article examines the implications of such an exemption in the context of U.S. payroll taxes and discusses the broader question of using tax policy to advance social and economic agendas.
U.S. Payroll Taxes and Small Businesses
Small businesses in the United States often struggle with the burden of payroll taxes, particularly when employing low-wage workers. Payroll taxes include FICA (Social Security and Medicare taxes) and FUTA (unemployment taxes). Under current tax law, the FICA tax stands at 7.65% of the employee’s wages up to $94,200, with both employers and employees sharing the cost. FUTA tax is 6.2% on the first $7,000 of employee wages, offset by a 5.4% state unemployment tax credit.
One only has to consider the trust fund disputes that end up in court. These disputes almost always result from a struggling business that uses the payroll tax amounts withheld from employees as a short-term loan, but not remitting them to the IRS timely. The business owners are often well-intentioned, i.e., have the intent to keep long-term employees employed, but then the business does not deliver financially and the owner is not able to pay the payroll taxes over to the IRS. The trust fund penalty is the result, not the problem. The problem is often the burden payroll taxes have on a small business.
In an attempt to ease this burden, the IRS introduced Form 944, which streamlines the process for small businesses with less than $1,000 in employment tax liabilities. However, this measure falls short of providing significant relief for most small businesses and their low-wage workers.
Adopting a policy similar to the French proposal in the United States could benefit thousands of small businesses and low-wage employees. The tax exemption might be more impactful for lower-wage earners than merely increasing the national minimum wage.
Taxes and Policy Agendas: Pros and Cons
Taxes serve various purposes, including funding public goods and services like infrastructure, education, and defense. However, taxes have also been utilized to achieve social and economic policy objectives, such as promoting social welfare and incentivizing specific behaviors.
Proponents of using taxes to advance policy agendas argue that doing so enables the government to address social and economic issues directly. Taxes can be used to fund social programs or provide tax incentives for businesses investing in renewable energy or domestic research and development, thereby promoting social welfare and encouraging positive behaviors without relying on market forces.
Opponents argue that using taxes for policy agendas may lead to unfairness or inefficiency. For example, tax credits targeting specific industries could distort the market and create unfair advantages for some businesses. Additionally, funding social programs through taxes might disincentivize work or foster dependency. It can also allow for sophisticated tax planning to take advantage of tax benefits in ways that were not envisioned or intended.
The debate over using taxes to carry out policy agendas raises complex questions about balancing social welfare and economic efficiency. Policymakers and voters must carefully weigh these trade-offs when considering tax policy changes. While Congress has historically used taxes to advance policy agendas, the impact of such decisions on small businesses and low-wage workers remains a critical consideration in crafting effective tax policies.
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