Last week on the Washington Post’s Wonkblog, Ezra Klein wrote a piece arguing the following: “The big lie of the fiscal cliff is that the argument is between Democrats who want to raise your taxes and Republicans who want to cut your taxes. That’s wrong. Republicans want to raise taxes on more people than the White House does.”
Klein is referring to two issues: the end of an expansion of the earned-income tax credit, and the expiration of the payroll-tax cut. Democrats appear to support extending the former, which House GOP plans have not done — but most people would dispute his contention that limiting a refundable tax credit, essentially a check the government mails to low-income workers, is really a tax hike, since it doesn’t increase the amount they pay in taxes. The expiration of the payroll-tax cut, however, is a true tax increase: It will raise taxes significantly on almost every working man and woman in America — and regardless of what Klein says, the White House and congressional Democrats support a deal to make this happen, too.
President Obama and the Democrats, that is, want to raise taxes on just as many people as Republicans do, and they all are about to do so in a way that seriously hurts America’s working class and our nation’s economy.
Klein’s piece was posted on Thursday, but the contours of a likely deal remain basically the same: The Bush tax cuts will be preserved for all workers below a certain income threshold, the exact number being somewhere between $250,000 and $500,000; it appears that the additional demand of the Democrats, who hold the advantage, is for an early debt-limit increase and an extension of unemployment benefits. The president’s first fiscal-cliff plan, which Treasury secretary Timothy Geithner presented to the Senate in mid-December, included almost no spending cuts and all of the president’s budget’s revenue demands — essentially everything the Democrats wanted, to the point where Republican senators considered it risible — and still, a payroll-tax-cut extension for the working class was nowhere to be seen.
Under the Democratic and Republican plans, therefore, all Americans will see 2 percent more of their income up to $106,800 taken away by the federal government than they did in 2012. For the average U.S. household, which earns about $50,000 a year, that’s $1,000.
Several weeks ago, at the urging of the Obama campaign, thousands flooded Twitter with the “my2k” hashtag, protesting the possibility that congressional intransigence would mean the expiration of the Bush tax cuts for all Americans, increasing taxes on the average family by $2,000. But now that the president and Congress seem content to throw all Americans off the FICA cliff, depriving the average American family of their “1k” — two months’ worth of groceries for an average family of four, or, if you’d rather, a few replacement planks for the teak deck of John Kerry’s Hinckley. (One group unaffected by a higher payroll tax is American workers who aren’t enrolled in Social Security — many state- and local-government employees, also known as Democratic voters.)
It is clear enough that the payroll-tax holiday’s expiration is, as Daniel Foster put it the other day, recessionary and regressive. That is, its expiration would significantly slow economic growth in the coming year — probably by around 0.5 percent of GDP, according to Wall Street projections, and that would happen because it takes a much bigger chunk out of lower-income Americans’ paychecks than upper-income earners’ (see this chart from the Tax Policy Center about the 2012 extension). To give Klein credit, I assume his personal policy preference is to have an extension as well.
If the president wanted to enact both of the ideals on which he campaigned — not balancing the budget on the backs of the poor, and asking the rich to pay their fair share — and was listening to his administration’s economists, who know that the payroll-tax extension is effective Keynesian stimulus, he would support at the very least a one-year extension of current policy.
Democrats’ main objection to the payroll-tax holiday is that it imperils the funding of Social Security (not, as many have falsely claimed, Medicare, which is funded through general revenues and a separate, unchanged payroll tax, though on one’s paycheck these taxes are lumped together as “FICA”). This objection is based on the accounting fiction that Social Security revenues, which are paid out of tax receipts and redemptions from the program’s trust fund, support the program, when for decades much of these receipts have gone to buying Treasury bonds — that is, to providing the cash for discretionary spending. If payroll-tax revenues really determine the solvency of Social Security, then in about 20 years the program will see its benefits cut by about 30 percent, when the trust fund runs dry. Needless to say, the same Democrats who oppose Social Security reform, and nearly everyone else, know this will not occur.
Throughout budget negotiations, the president has called for a balanced approach, by which he usually means tax increases on the rich commensurate with the spending cuts Republicans would like. But under his plan, in 2013, about half of the tax increases will fall on the rich (the 1 percent or the 2 percent, depending on what deal is struck), and about half of the extra revenue will come from increased payroll taxes — that is, from the incomes of 100 percent of Americans, and disproportionately from the poor and the middle class.