PAYROLL TAXES IN THE FINANCE OF SOCIAL-SECURITY

The growing use of payroll taxes to finance social security has raised concerns about their potential effects on employment. This analysis r eviews evidence about tile economic attributes of payroll taxes and co mpares them with alternate means of finance. First, the comparative at tributes of general payroll taxes unattached to benefit programs are e xamined, and their long-run performance in economic efficiency and gro wth are Found to be relatively favourable. Second, the reasons for usi ng payroll taxes to finance social security programs in particular are assessed. The nature of benefit-tax linkages and the associated incen tive effects are explored. Third, evidence on the long-run incidence o f employer payroll taxes and their employment effects is assessed. It is found that most or all of the short-run employment Effects dissipat e in the longer run, as the tax burden is shifted into lower pay. Poli cy findings are that payroll taxes are well suited for financing socia l security, benefit-tax linkages may need reform in some programs from both the benefit and tax sides, and the transitory employment effects of changes in payroll tax rates should not dominate longer-run consid erations for public policy.