Create an Employer Compensation Tax

This option replaces the current employer-side Social Security and Medicare payroll taxes with a 7.65 percent tax on all employee compensation.

The current payroll tax base excludes certain types of non-wage-and-salary forms of employee compensation, most notably employer-sponsored health insurance, employer contributions to retirement accounts, and other fringe benefits, and the Social Security tax base is capped at $184,500 for 2026 (a cap that is adjusted for inflation every year). The employee compensation tax under this option would apply to all types of compensation without any cap.

Though the tax would be imposed on employers, its economic burden would fall on workers. By applying to a larger base of labor income without any caps, the employee compensation tax would increase marginal tax rates on labor income, discouraging work and decreasing economic output. Compared to other types of taxes, however, the employee compensation tax would be relatively efficient because the entire burden would fall on labor, which is less responsive to taxation than capital, and relatively neutral, because it would not favor certain types of employee compensation over others.

On a conventional basis, this option would decrease the primary deficit by $2,707.1 billion over the budget window. Long-run GDP would fall by 0.9 percent, and long-run GNP would fall by 0.6 percent. On a dynamic basis, the primary deficit would decrease by $1,968.1 billion from 2027 through 2036, $739.0 billion less than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be lower than baseline, reaching 162.5 percent by 2056.

On average, taxpayers would see decreases in their after-tax incomes in 2036 of 1.2 percent. The top quintile of taxpayers would experience a 1.4 percent decrease, whereas the bottom quintile would experience a 0.7 percent decrease. On a long-run dynamic basis, taxpayers would see a 1.9 percent decrease on average.