Committee on Economic Security (CES)
Volume VI. Social Insurance
K. Miscellaneous Studies
THE SOCIAL SECURITY ACT AND SALES TAXES
by Edwin E. Witte
Attacks have been made upon the pending Social Security Act, sponsored by the Administration, on the score that it imposes heavy sales taxes which will retard recovery. This argument is presented as if the maximum rates of tax under Titles VIII and IX would become effective immediately, and on the assumption that these taxes are really sales taxes which will increase the prices which must be charged for goods by at least the percentage of the tax. Specifically, it is stated that the Bill imposes a 9 per cent payroll tax, and the impression is conveyed that prices would be increased by at least this percentage with a most detrimental effect upon business.
The ultimate maximum total of the taxes imposed in Titles VIII and IX measured by wages and salaries is 9 per cent, but this rate will not apply until the year 1949. Even in that year, 3 per cent, of the total 9 per cent, will be paid by the employees, and it has never been claimed that a tax on employees is shifted to the consumers. Of the ultimate 6 per cent tax payable by employers, 3 per cent is for unemployment compensation purposes, and 90 per cent of this 3 per cent will not actually be payable to the Federal Government if the states enact unemployment compensation laws, as is to be expected. This 3 per cent tax for unemployment compensation purposes will actually be paid to state unemployment compensation funds, and will not even be called a "tax" but an "employers' contribution".
At the outset and for thirteen years, there is no 9 per cent tax. The initial tax upon employers, for the year 1936, is a one per cent tax for unemployment compensation purposes. 90 per cent of the one per cent in most states will not be paid to the Federal Government but to state unemployment compensation funds as an employers' contribution. This tax for 1936 is not payable until 1937. In the next year, the rate for employers becomes 3 per cent--2 per cent for unemployment compensation and one per cent for old-age annuities. Then it is increased gradually until it reaches the maximum of 6 per cent in 1949, the rate which the opponents of the Social Security Act discuss as if it were to be effective from the beginning.
Not only do these attacks upon the Bill misrepresent the facts regarding the initial rate of taxation, but they proceed on the false assumption thatpayroll taxes are sales taxes, which will increase the price that must be paid for goods by at least the percentage of the tax.
One essential difference between sales taxes and a payroll tax is that the latter effects only one item in the cost of production. A one per cent payroll tax does not mean a one per cent increase in prices. The UnitedStates Census of Manufacturers of 1929 (included in the general Census of 1930) shows that on all manufactured products the average direct labor cost is but 21 per cent of the value of such products, and 45 per cent of the value added by manufacture. Since a payroll tax is computed on the wages and salaries paid, and not on the entire sale value of the products (as is a sales tax), the resulting increase in prices is very much less than the rate of the tax.
Payroll taxes for old-age annuities are essentially like the contributions which many employers now make to industrial pension funds and groupannuity policies. Like the payroll taxes imposed in this Bill, these contributions are presumably shifted to the consumers, but no one would call them sales taxes. Employer contributions toward the cost of old-age annuities for their employees really represent a charge for the wear and depreciation of the human contributors to production, just as the employer sets up a depreciation account to cover the wear and obsolescence of his machinery, which, likewise, enters into the cost of production and is added to the price of the goods.
Employer contributions to unemployment compensation funds are payments in all essentials similar to the contributions which employers make for workmen's compensation. The premium for workmen's compensation is always computed on a payroll basis, and, in the long run, likewise, tends to be shifted to the consumers. Employer contributions under the state unemployment compensation laws are not called taxes at all, but "contributions or premiums", and while in the Federal Act, they must be described as taxes their effect is very different from a sales tax.
Unemployment compensation in essence is a payment made to an unemployed worker for a limited period following unemployment, during which he has a reasonable prospect of getting back to his old job. Very often the employer desires the employee to wait for his old job, and employees invariably arereluctant to accept other employment which will take them out of consideration for immediate reemployment. Unemployment compensation amounts to payment of a partial wage during this period while the employee is waiting for reemployment, very often with the employers sanction or encouragement. Requiring the employer to pay such partial compensation is no more a sales tax than is the payment of wages while the employee works. Wages, likewise, are added to the cost of production and paid for by the consumers; partial wages for a limited period while the employee and the employer both expect the unemployed workman to get back his old job, is as properly a part of the cost of production as is the wage bill.
Far from levying new sales taxes, the coming into effect of the program embodied in the Social Security Act may have a tendency to check further sales tax levies. The absence of any reserves from which compensation could be paid to unemployed workmen during the present depression resulted in such great relief costs that more than one-half of the states have been compelled to levy retail sales taxes--almost invariably to provide revenue for relief purposes. Passage of the Social Security Act will not immediately reduce relief costs, but should have a pronounced effect of lessening the relief burdens in future years. To the extent that it will do so, it will also lessen the necessity for new and increasing sales taxes. Immediate enactment of this Bill should serve to reduce the pressure for a Federal sales tax. While the payroll taxes are not sales taxes, the very fact that they have been so described by the opponents of the Bill will render it more difficult to get Congress to vote for any Federal sales tax.