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Payroll tax unnoticed by workers, but welcomed by Treasury

Workers have been paying the full 6.2 percent Social Security payroll tax for almost two years now.

Payroll-tax-paystubYou remember this so-called tax holiday in place in 2011 and 2012.

During those years, the deduction from your pay that goes toward the federal retirement program was reduced by 2 percentage points to 4.2 percent. The matching employers' portion stayed at 6.2 percent.

The payroll tax cut for workers was made so that folks would have a few more dollars to spend, giving the sluggish economy a buying boost.

But after two years, Congress decided enough was enough and let the payroll tax go back up on Jan. 1, 2013.

It's debatable whether the temporary tax cut had any economic significant effect. Maybe it didn't work as well as was hoped because people never really noticed they had extra cash.

Unnoticed tax for two years: That's possible since, according to a new study, a lot of people didn't notice when the full tax was put back in place.

A 2013 Google Consumer Survey asked folks whether at the beginning of the year it their Social Security taxes were raised, lowered or left the same. Most of the respondents opted for the fourth answer; they said they didn't know.

Only 28.9 percent correctly answered that their taxes had gone up.

The question was asked again in 2014. This time, workers seemed a bit more, but not completely, aware of their payroll tax rates.

"This year provides a useful comparison since we still have the same president in the White House and divided control over the houses of Congress," writes Dean Baker in "The Big Tax Increase Nobody Noticed," a Center for Economic and Policy Research briefing on the tax changes and subsequent surveys.

In the second survey, 19.8 percent said their payroll taxes had gone up, although the rate was the same as in 2013.

Explaining tax obliviousness: Why are so many people unaware of the taxes they pay? And from a policy, and political, standpoint, what does that mean for taxes?

There are a couple of reasons why people didn't freak out or even notice when the payroll tax returned to its full rate.

First, it was a small tax break. For a lot of folks, the amount up or down was negligible.

Second, as the payroll tax holiday was ending, Congress was in the midst of dealing with the expiration of many other tax laws.

Sure, Representatives and Senators could have slipped the continued tax holiday into the fiscal cliff bill being debated in late 2012 and early 2013, but other tax and fiscal matters were more pressing. So there was bipartisan acceptance on Capitol Hill of the payroll tax rise.

"The public response likely would have been different if the leadership of one of the major parties had been openly arguing against the tax increase," wrote Baker.

Possible future tax road map: What does the unnoticed payroll tax situation mean for possible future taxes?

It could be good news for efforts to bolster the Social Security system, which is projected to face a funding shortfall in the decades ahead.

"These poll results suggest that the public may not be especially adverse to modest increases in the payroll tax, since they may not even notice them," writes Baker. That assessment is in line with other polls that indicate most Americans favor strengthening Social Security through revenue increases such as raising the program's tax rate.

Context is key, too.

The poll results suggest that when it comes to tax increases, the actions of political leaders and how they are reported in the media are as, and possibly more, important than inherent public opposition to higher taxes.

Tax revenue boost: The expiration of the temporary cut in payroll taxes was among the contributors to the Treasury Department's collection of $3 trillion for the first time in its history.

Bankrate Taxes Blog iconAs I noted last week at my other tax blog, that record-setting revenue intake and other final fiscal year 2014 budget results led to a significantly lower federal deficit.

The $483 billion that Uncle Sam owed at the end of the last fiscal year was $197 billion less than the fiscal year 2013 deficit.

Also over at Bankrate last week, I looked at how local politics, elections and taxes are intertwined.

I usually post my additional tax thoughts at Bankrate Taxes Blog every Tuesday and Thursday. Then the next weekend (usually), you can find highlights and links here.

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