Politics & Policy

A Bipartisan Tax Increase

The payroll-tax cut’s expiring should be a source of shame for Democrats and Republicans.

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.#ad#

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.

#page#Klein suggested the other day on Twitter that the White House actually wanted to extend the payroll-tax cut but decided that it would rather fight for “a deal” palatable to congressional Democrats — bear in mind, the most important part of any deal proposed by the administration is rate increases on high-income earners. Even assuming Klein is right that the White House wishes to extend the tax cut, without any public presidential intimation to suggest it, rate increases in the rich before tax relief for all is still a damning decision.

It would be so even if the two policies were of equal importance in 2013, which they are not. The stimulative relief the payroll-tax cut affords is necessary this year — why not fight for its extension for 2013 while conceding another one-year extension on the Bush tax cuts for the wealthy, which are meaningful only in the long term, and could be curtailed once the president has presided over an economic recovery? (To be fair, the deficit will naturally shrink as the economy recovers and tax collections rise, giving the president’s rate increases less urgency, and he would like to lock in rate increases while enjoying his reelection honeymoon. Neither concern, though, should trump the payroll-tax cut for a leader who is most interested in equitably bringing about an economic recovery.)#ad#

What about Republicans who worry about the deficit — to which extending the holiday will add just over $100 billion? I count myself among those who worry about our long-term fiscal picture, which is woeful, but also among the great majority who know that our deficit cannot and should not be closed in the next few fiscal years. There are, of course, Republicans who oppose nearly any policy, even tax cuts, that deepens the deficit, but they are relatively rare. Further, many GOP deficit hawks tend to argue that President Obama’s tax increases on the rich, which are of a similar scale as letting the payroll-tax rate rise, will not bring in enough revenue to address our deficit problems but are a big enough tax increase to harm the economy. The payroll-tax cut returns only a little more revenue (and cuts only intergovernmental borrowing, not debt held by the public) and is widely agreed to be an economic handbrake.

The decision to let the payroll-tax cut expire in a fragile economy, as working-class Americans struggle with stagnating incomes, should be a source of shame for Democrats, who consider themselves guardians of the vulnerable, and for Republicans, a main tenet of whose economic philosophy is that tax increases devastate the economy. There is a time to close America’s deficit and shore up our long-term finances, but it will not happen this year or the next. The best solution would be something like a full-year extension of the tax cut and then phasing it out if or when the economy strengthens in 2014. The caucus for that proposal so far includes Ross Douthat, the editors of National Review, Democratic senator Chris van Hollen, and MSNBC host Chris Hayes. President Obama is among the missing.

 — Patrick Brennan is a William F. Buckley Fellow at the National Review Institute.

Patrick Brennan — Patrick Brennan is a writer and policy analyst based in Washington, D.C. He was Director of Digital Content for Marco Rubio's presidential campaign, writing op-eds, policy content, and leading the ...

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