The Many Names of the Entitlement State
In “Cut the Payroll Tax” (October 16), James C. Capretta asserts: “Cutting it would encourage more people to join the labor force; it would also motivate those who are already working to increase the number of hours they work.” Really? In all my years in and out of the workplace I never once considered taking or leaving a job or modifying my hours because of the payroll tax. Other than economists, politicians, journalists, and business owners, does anyone? Are most workers even aware of the payroll tax? Considering how many hours American laborers work, do we really need to be encouraged to work more? Mr. Capretta’s claims regarding the payroll tax strike me as the sort only someone who is remote from the workplace would make.
James C. Capretta seems to be creating a Rube Goldberg machine — an overly complex contraption designed to perform a simple task in a convoluted way — in his proposal to cut the payroll tax to help the middle class and boost growth.
The payroll tax allows retirees the notion that their Social Security benefits are mostly earned. It is a relatively progressive “tax” in that benefits are skewed toward low earners, who get much more of their earned income replaced than higher earners do. Plus, the Earned Income Tax Credit greatly reduces the impact of the payroll tax for one in five low earners.
The only reason I can see for reducing the payroll tax, and then eliminating exclusions for health insurance and other benefits to increase it again, is the recognition that nearly half of “taxpayers” don’t pay federal income tax. Mr. Capretta notes that “the income-tax burden on low- and moderate-wage households has been steadily reduced,” with the payroll tax being another “hefty” burden that could also be reduced. But Social Security and Medicare are in trouble, and any effort to reduce contributions further endangers future benefits. If Congress wants to increase welfare payments to the middle class, they should do it directly, leave Mr. Goldberg out of it, and perhaps use the second half of Mr. Capretta’s proposal, taxing those excluded benefits, to add much-needed money to the Social Security and Medicare trust funds.
Thomas J. Straka
James C. Capretta responds: Both Mr. Straka and Ms. Amrhein ignore the primary purpose of a payroll-tax-rate cut, which is to improve economic incentives. Indeed, the whole point of tax reform is to provide better supply-side incentives to encourage more work, savings, investment, business formation, and economic growth. For many millions of workers in the middle class, the most important tax is the payroll tax, not the income tax. Cutting the payroll tax would allow them to keep more of what they earn. It would also encourage them to earn more: People do respond to incentives. If we don’t believe that, then the entire exercise of tax reform is a waste of time.
The payroll-tax rate itself is entirely unrelated to the benefits paid by Social Security and Medicare. In Medicare, the tax does not determine benefits. In Social Security, it is a worker’s earnings, not taxes paid, that factor into the benefit calculation, and then only some of the time. Cutting the payroll-tax rate would in no way disrupt incentives that workers have to contribute to Social Security.
Conservatives must understand that a large and expensive entitlement state, even if it is called Social Security and Medicare, is a burden on the economy, and especially the middle class. Paying high payroll-tax rates to cover the expenses of these programs suppresses growth just as much as high income taxes do, and in some cases more.