What if we were to tell you there is a tax on wages that hits working families hardest, that the purported purpose of this tax — to pay for old-age entitlements — is a fraud, and that John Boehner wants to raise it as part of a fiscal-cliff deal?
Unfortunately, that is exactly where we are. President Obama and many congressional Democrats are on record supporting a one-year extension of the two-year-old payroll-tax cut, which reduced the employee piece of Social Security withholdings from 6.2 to 4.2 percent of taxable income. But buried in House Republicans’ counteroffer is the fact that it would let that cut expire at year’s end. If that were to happen, nearly every paycheck in America (certain government employees are excepted) would get smaller on January 1, and over the course of the year, the average family earning $50,000 would get to keep about $1,000 less.
Many middle-class households pay more in payroll tax than in income tax (for some families in the middle quintile, as much as three times more), making action on the former as consequential as action on the latter when it comes to kitchen-table economics. Nor does the money generated from the expiration have even the cosmetic virtue of being counted in the $800 billion in new revenue to which Boehner has already committed. Instead it is being treated as an extension of “current law,” no doubt in part to sidestep the of-late sensitive issue of whether failing to vote to renew the cut constitutes voting to raise taxes.
And yet despite all this — indeed, despite the fact that it was right-of-center economists who floated a payroll-tax cut as a part of the stimulus deal, a year before the White House took up the cause in 2010 — Republicans now find themselves in danger of being seen to obsess over marginal rates for “the rich” while endorsing a massive tax hike for every wage-earner in the country as a kind of afterthought.
This is folly. Congressional Republicans must change course and back an extension of the payroll-tax cut.
Doing so would have another benefit, indirect but potentially far more consequential. Nominally, payroll-tax revenue winds up in the Social Security trust fund. With the payroll-tax cut, the government has been making up for that lost revenue with general funds from the Treasury. Progressives and other interest groups fear such a precedent, as they are ideologically invested in the illusion that old-age entitlements are not modes of redistribution but earned benefits in a pay-in system. They fear that breaking down the wall between Social Security and other federal spending will destabilize this illusion.
We hope they are right. The trust fund is a fiction, and the wall has already been broken down. The government for years used payroll taxes to fund general operations — and now that entitlements cost more than payroll taxes bring in, it uses income taxes and borrowing to make up the difference. This would be true even without the payroll-tax cut.
Preserving lower payroll-tax rates is good for working families, and for the economy. If it also reveals our entitlement problem and our debt problem to be one and the same, so much the better.