Note: I sent this to a few people, some of them economists, in February, 2021. But the movement didn’t come.

Back in August, President Trump started an initiative to end payroll taxes. At the same time, he insisted that Social Security and Medicare would continue in full force.

Impossible, said many observers. Getting rid of payroll taxes would dry up the income stream that sustains Social Security and Medicare. Maybe what Trump really wants to do is starve the beast, put an end to all three: payroll taxes, Social Security, and Medicare.

This observer says, Trump’s initiative is a challenge. Let’s take it on.

Payroll taxes should be eliminated. And both Social Security and Medicare should not only continue but be strengthened and expanded. And, Yes: We can do this.

Payroll taxes penalize employees for working, and employers for hiring. They do not apply to any other kind of income: royalties, rent, interest, dividends, profits from selling property or trading in stocks and bonds. Payroll taxes discourage working for a living.

Social Security and Medicare benefits are lifelines for millions of people. And it is a mistake to think of these benefits entirely, or even primarily, as individual entitlements. These are measures that provide security for society as a whole, true social security. To give one example: Consumer confidence is bolstered when seniors know they have steady income and their health care costs will be covered. Thus paying Social Security and Medicare costs from general revenue is justifiable on the same basis used to defend tax breaks for certain industries, and bailouts for banks, to give two examples.

And, Yes, we can do this.

How? Let’s start modestly. Here’s a look at adjusting taxes to keep Social Security and Medicare funded at current levels without using payroll taxes. The subject of expansion can wait for a while (but not for long).

Government estimates for tax revenues for fiscal year 2021 project that income taxes will produce 50% of federal income, payroll taxes 36%, corporate taxes 7%, and all other (estate taxes, excise and custom duties, and interest on the Federal Reserve's holdings of U.S. Treasury bonds) 7%.¹ Total revenues for FY2021 were estimated to be $3.863 trillion, leaving a projected budget deficit of $966 billion.

The task is simple, and stark: make up the loss of 36% of FY2021 income, an estimated $1.373 trillion, by shifting the burden to income taxes and corporate taxes.

Here is one way to approach the task. This plan would reduce the tax burden for every person and family with an annual income under $200,000, and would shift the tax burden on corporations from the payrolls they carry to the profits they receive.

Those payroll taxes come from workers’ payroll, 15.3% skimmed right off the top without allowances for any exemptions or deductions. Half of that, 7.65%, is deducted from employee pay, posted right on the pay stub.² The other half is the employer “contribution,” not considered part of employee pay. “Contribution” is in quotes because it is part of the employer’s labor costs. For a business to make a profit, or just break even, its employer “contribution” has to be covered by employee productivity.

When payroll taxes end, how should the relief windfall be distributed? At the very least, employee paychecks will not have that 7.65% taken out of their take-home pay. And, because the employer “contribution” was paid out of employee productivity, there will be strong arguments that all workers are due a 7.65% raise.

But corporate taxes are going to increase. Plus, letting businesses add a greater portion of employee productivity to their bottom lines will give them incentive to hire more workers. For now, let’s split the difference. Employees get a 3.85% raise, so their paychecks should go up 11.5% - before income tax withholding, of course. And the 3.8% employers are not paying in payroll taxes nor in wages will sweeten the bottom line - again, before taxes.

When payroll taxes end, how should the tax burden be distributed? Remember, this is 36% of federal income for FY2021, about $1.373 trillion. For now, let’s go with adding half to income taxes, and half to corporate taxes. Income taxes will go from covering 50% to 68% of federal income. And corporate taxes will jump from supplying 7% of federal income to 25%.

Horrors! Large corporations will move out of the U.S., leaving the tax burden to smaller businesses! But they will still want to do business here, and their U.S. operations can be taxed.

How corporate taxes should be configured to meet the 18% leap, this writer will leave to people with real expertise. By now, readers will have realized they’re reading seat-of-the-pants projections, back-of-the-envelope calculations. All of these can be, should be, analyzed and revised.³ They’re not given to be the final word. These projections are meant to show that ending payroll taxes and still funding Medicare and Social Security is possible. Difficult, but possible.

Perhaps the most important point to make about corporate taxes is that corporations should be taxed on their profits, not their payrolls.

One way to adjust income taxes to make the 18% leap is to increase each bracket tax rate by 36%. For example, the lowest bracket tax rate for a married couple filing jointly, for taxable income from $0 to $19,750, is 10%. That would go up to 14%. At the other end, the highest bracket for all taxable income above $622,050, 37%, would go up to 50%.

Here’s a comparison of what the change would mean for a married couple filing jointly.
The standard deduction is $24,800. Since taxable income doesn’t begin until going above $24,800, the income tax bill for the first $24,800 is $0. But payroll taxes start from the very beginning, at the rate of 7.65%. So under the current (payroll tax) system, the tax bill for the first $24,800 is $1,897.20. Under the new system, there are no payroll taxes, so the tax on the first $24,800 is zero.

The first tax bracket covers income from $24,800 to $44,550. The income tax rate for that $19,750 is currently 10%. But with payroll tax, the total tax rate on that income is 17.65%, and the tax bill is $3,485.88. Added to the payroll tax for the first $24,800, the total federal tax burden for an annual income of $44,550 is $5,383.08. Under the new system, the income tax rate goes up from 10% to 14%, but there are no payroll taxes. So the tax bill for that income is $2,765. Since there is no tax on the first $24,800, the tax bill for an annual income of $44,550 is $2,765.

The second bracket covers the income from $44,550 to $105,050, or $60,500 additional income. The income tax rate for that income is currently 12%. But with payroll tax, the total tax rate on that income is 19.65%. So the total tax bill on that income is $11,888.25. Added to the tax on the first $44,550, the total tax bill for an annual income of $105,050 is $17,271.33. Under the new no-payroll-tax system, the income tax rate goes up to 16%. The tax on that income is $9,680. The total tax bill for an annual income of $105,050 for a married couple filing jointly is $12,430.

Click this link to see chart illustration

In the next bracket, the new income tax rate (30%) is slightly higher than the current tax rate plus payroll tax rate (22% + 7.65%). Under the current system, as individual income earners exceed $137,700 in payroll income, they stop paying Social Security payroll taxes, dropping their payroll tax rate to the Medicare only rate of 1.45%. As income rises, the new system with higher rates and no payroll taxes shifts the tax burden to those with higher incomes. For most married couples, the crossover point is somewhere above $200,000.

Click this link to see chart illustration

Some system along the contours of what is suggested here will end payroll taxes while preserving Social Security and Medicare. President Trump’s idea is definitely doable. And it could be combined with President Biden’s plan to reform taxes so that everyone earning under $400,000 a year will pay less in taxes. We could come up with a tax structure that would provide real relief to working Americans, and combine the visions of the outgoing President and the newly inaugurated President. Wouldn’t that be remarkable!