If the Trump Administration really wants to transform our tax code, and the conversation, it should propose ending the employer’s portion of Social Security and replacing the revenue with a national sales tax. Doing so would:
- Decrease the cost of employing the average American worker by almost $4,000 a year
- Make domestic manufacturing more competitive
- Reduce the pressure to shift from employees to contractors
Philosophically, government works best when the group receiving a benefit or service from government also pays for it. The service that the government provides through Social Security is stabilization of consumer demand. The government insures that retirees are able to buy what they need to live, and businesses have more consumers who can afford to buy what they sell.
All employees directly benefit, and so they pay into the fund. All businesses that sell to US consumers also benefit. When Social Security was implemented in 1935 there was almost no foreign trade, and an employer payroll tax was an approximate way of making sure that every business that benefited also paid.
The world has changed. A significant percentage of what is sold to American consumers is no longer produced by American workers. A significant number of businesses that benefit from the government’s stabilization of consumer demand don’t pay for it. Our government is providing a free service to businesses that produce outside of the US, while at the same time charging US producers more and lessening the cost competitiveness of US workers.
Ending the employer portion of Social Security and instead moving to a nominal national sales tax to replace the revenue would reconnect the payment with the benefit – all companies that benefit from stabilized demand would pay for it. Non-US producers would no longer benefit from a government service subsidized by US producers.
The change could be revenue neutral, not a tax cut or tax hike. Functionally, businesses already have to record revenue, minimizing the additional paperwork burden. As with any change in tax policies, there will be winners and losers. However the distribution of the tax burden would ultimately be fairer – every business that benefited from selling to US consumers would contribute.
The employer portion of Social Security is a legacy of a different time and a radically different economy. It is unfair to US producers, makes US workers more expensive to hire and hurts our ability to compete internationally. Ending the employer portion of Social Security and moving to a national sales tax would be a more rational approach that would benefit our country.