Exchequer

Democrats Raise Taxes on Poor to Subsidize Millionaires

There are basically two ways of looking at the fiscal-cliff deal. One possible headline reads:

“Congress does basically nothing.”

For all of the operatic angst and wailing surrounding the negotiations, what was produced was essentially a status quo, kick-the-can extension of most current policies, with a few minor changes that will have very little impact on the long-term fiscal health of the country.

But there is another possible headline:

Democrats insist on raising taxes on poor to protect millionaires and billionaires.”

That is not how the New York Times put it, but it is true.

Of all the tax cuts of the Bush-Obama era, the income-tax cuts for the so-called rich (households earning $250,000 or more) were the least expensive in terms of forgone revenue. The Bush tax cuts for $250,000-plus were estimated by the CBO to deprive the Treasury of about $80 billion a year; the income-tax cuts for the middle class were estimated to cost $220 billion a year; the payroll-tax holiday, which disproportionately benefits the poor and middle class, cost about $120 billion a year.

Extending the payroll-tax holiday was on almost nobody’s radar during the fiscal-cliff debate. Why? The cynical answer is that nobody really cares very much about the interests of poor people, and there is something to that. But I think the answer is a bit more complex: Republicans believe (correctly) that temporary tax holidays are bad economic policy, contributing very little in the way of stimulus or long-term growth prospects but increasing uncertainly about future tax conditions. Democrats dislike payroll-tax reductions because they undermine the myth that Social Security is a self-funding investment (payroll taxes allegedly fund Social Security) rather than what it is: a deficit-expanding welfare program for the middle class. And everybody had a good reason to knock that $120 billion a year off of their CBO scoring.

The expiration of the payroll-tax holiday will reduce the real income of middle-class and working-poor households by around 1.5 percent on average. So while the fiscal-cliff deal raises taxes on those making $400,000 and up, it also raises taxes on workers in the bottom (0.00 percent) income-tax bracket, who do pay payroll taxes. Republicans would have been happy to extend all of those tax cuts into the future, but President Obama and his Democratic allies insisted on tax increases — knowing full well that would mean tax increases on the poor as well as on the high-income.

But not all the rich folks got a tax hike. As usual, well-connected special interest groups — from Hollywood to the booze lobby — secured sweetheart deals for their own narrow interests. So the industry that employs Sean Penn and Ed Asner gets a nice fat tax break, and poor people with jobs get the shaft. The people who rail against “corporate welfare” and “crony capitalism” took the time to cut a nice side deal for the rum industry. You will notice that the Bacardi family is not poor. That’s Washington.

My own preference is to eliminate the payroll tax and with it the myth that Social Security and Medicare are self-funding insurance programs rather than old-fashioned welfare programs with a largely middle-class constituency. That would also help to end the game of playing the “discretionary” budget off the “mandatory” budget — all spending is discretionary, and when you’re running trillion-dollar deficits, some real discretion is called for.

Not that you will get it from the incompetents in Washington.

– Kevin D. Williamson is National Review’s roving correspondent. His newest book, The End Is Near And It’s Going To Be Awesome, will be published in May. 

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