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What if taxes go up and no one notices?

At the start of 2013, most American workers faced a 2 percent cut in their take-home pay, as the 2011-2012 Social Security payroll tax holiday came to an end. Conventional wisdom tells us that the public revolts when taxes go up. But in this case, not only did public outrage fail to materialize, but they seemed to not even notice the increase.

Compared to past payroll tax increases, this was an extraordinarily large and sudden one. For example, from 1980 to 1990, the rate was raised gradually by a total of 2.24 percentage points; in no year did the rate rise by more than 0.72 percentage points, or just over one-third of the 2013 increase.

That is why it is striking to find that most people apparently did not even notice that their taxes had gone up. In a 2013 Google Consumer Survey, the Center for Economic and Policy Research (CEPR) asked whether the Social Security tax had been raised, lowered or left the same at the beginning of the year. A majority answered that they didn’t know. Less than three out of 10 correctly answered that the tax had increased.

{mosads}Since some people generally believe that government always raises taxes, this result likely overstates the share of the public that actually noticed the tax increase. To get a sense of the size of this portion of respondents, we asked the same question again this year. Almost two in 10 people answered incorrectly that their Social Security payroll taxes had gone up at the beginning of 2014.

Let’s assume that the number of respondents who erroneously said that the tax went up this year gives us a rough estimate of the number of people who believe that the government raises taxes no matter what actually happens. Then we can estimate that the share of the public who actually noticed the tax increase would be the difference between the number who said the tax went up in 2013 and those who said, incorrectly, that it increased this year.

The difference between the percentage of respondents who said that the tax had gone up in 2013 and those said the same in 2014 was 9 percentage points. This means that less than one in 10 people surveyed recognized an unusually large increase in the payroll tax.

This has interesting policy implications. When looking at ways to reduce Social Security’s projected funding shortfall, numerous panels of experts, such as the Commission to Modernize Social Security and the Institute for Women’s Policy Research, include a small and gradual increase in the payroll tax as part of the solution. After all, this rate already has been raised gradually 20 times since Social Security was established to help ameliorate prior funding shortfalls.

In addition, the National Academy of Social Insurance used trade-off analysis, a market research technique, to find out what type of Social Security policy package Americans would choose for themselves. The most favored package of changes — preferred to the status quo by seven in 10 participants — also includes an increase in the payroll tax by 1 percentage point over 20 years (or 1/20th of a percentage point per year).

Yet very few political leaders have been willing to propose any increase in the Social Security payroll tax, not even one slowly phased in over decades. CEPR’s survey results suggest that the public may not be especially adverse to a modest increase, since they may not even notice it.

The 2013 payroll tax increase occurred in an environment in which no major political leaders were arguing against it. It was part of the bipartisan budget agreement, so both political parties had agreed to this tax increase. The public response likely would have been different if some political leaders had been openly arguing against it.

In other words, CEPR’s survey results suggest that the obstacles to implementing a gradual payroll tax increase to reduce Social Security’s projected funding shortfall reside in the decisions of political leaders, and how the media choose to report them, rather than any inherent public opposition to higher taxes.

After all, the public cannot be too upset by tax increases if they don’t even notice when they take place.

Woo is the director of domestic policy at the Center for Economic and Policy Research.

Tags payroll tax Social Security Withholding taxes

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