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Don't Cut the Payroll Tax Rate

16 Oct 2009
Posted by Bruce Bartlett

There seems to be a bit of a boomlet lately among right-leaning economists in favor of a temporary cut in the payroll tax rate to stimulate employment. See here for example:

http://www.marginalrevolution.com/marginalrevolution/2009/10/i-argued-in-favor-of-a-payroll-tax-cut-earlier-this-year-----keynes-favored-a-payroll-tax-cut-tyler-favors-a-payroll-tax-cu.html

Apparently the idea of cutting taxes only for big corporations and rich people is not getting much traction these days, so those that think there is never a problem that can't be solved by huge tax cuts have switched their attention to a tax that average people actually pay.

Unfortunately, those advocating a payroll tax cut are ignorant of its nature--it's not a tax just like all the others because it is tied to a specific cash benefit program. In my opinion, the payroll tax is more of a forced saving measure than a true tax. For this reason a cut in the payroll tax is very unlikely to reduce unemployment and will only make Social Security's finances more precarious, as I explain in my Forbes column this morning:

http://www.forbes.com/2009/10/15/payroll-tax-social-security-opinions-columnists-bruce-bartlett.html

don't cut payroll tax

I disagree, what have we seen from the stimulus so far? Nothing! It was sent to reward and solidify the Democratic base. By the time it gets anywhere it is needed we will be over 10% umemployment. If the government would have suspended the payroll tax in the first place companies and employees would have had immediate cash to maintain employees and pay mortgages. We have already caused severe damage to the economy by these slow pork stimulus packages. The Obama printing press wants to give to the seniors for healthcare, and another stimulus for the middle class. How bout a little truth for us workers, that would be nice! We're getting the shaft, and our children the same. By the time we dig our way out of this we will be like Mexico! Drugs will abound, we will produce nothing, and their will be a few rich elite in control. Viva the revolution.


Payroll Taxes ARE a tax

Payroll taxes are not taxes in the normal sense, as you mention here, but they certainly don't act like a forced savings plan like you mention.

Consider the person who makes around the 100k mark in a yearly salary. When this person retires, their rate of return on their Social Security "savings" is probably NEGATIVE. This is because the Social Security system re-distributes that money to those on the lower end of the income scale. This is why Social Security is such a fantastic deal for those who make say ... 30k a year.

Now, consider if this hypothetical 100k wage earning person decides to save into a 401k so that he can retain say 60 percent of his final salary. Given the way things are going, by the time this person retires there will be a means test on social security. It's possible that this person who paid into Social Security his entire life will see a large chunk of his "savings" confiscated by the means test. WTF!! Payroll taxes certainly doesn't look like a savings plan to this person.

I agree that cutting payroll taxes is just going to add to the issues facing Social Security and Medicare. I just think it's clear that the tax vs savings plan nature of payroll taxes really changes as you traverse the income scale.


Payroll tax as a tax

Not that I disagree with your larger policy point, but as to the idea that people don't think of the payroll tax as a "tax" but instead as a "contribution", maybe even such as to a 401(k), something they actually positively value as paying them more than they put in, well...

That's not entirely easy to square with the massive enforcement problems the IRS has in dealing with people pulling every kind of trick to get out of paying it -- employees posing as contractors, being paid under the table, small S Corps and partnerships paying their owners 100% profits/zero wages, "Nanny tax" evasion, and on and on. It is one of the IRS's very top tax evasion audit issues.

I mean, just ask its boss, Tim Geithner.

And the Social Security benefits workers get are in no way tied to the amount of tax they are assessed, or "contribuite" -- benefits are determined by earnings record, not tax record. The whole payroll tax system could be scrapped and replaced with another better source of revenue (VAT!) and benefits would remain unchanged.

So, since cutting the payroll "contribution" wouldn't cut their benefits at all, why wouldn't they value such a cut exactly as they would a tax cut?

As to worrying about such a cut underfunding Social Security in the future, hey, that ship sailed a long time ago -- Social Security is $16 trillion underfunded (at present value) already anyhow. This bit more would make a difference? Who cares about things on such a comparably small scale these days?

Besides, as you know, the SS surplus is just spent in real time anyhow, so the long-term funding it supposedly contributes to SS is nil, and actually going to come out of future income tax (or VAT?) increases.

Cutting the surplus and "trust fund balance" results in no real future loss to SS's financing at all (though the recession may already have done all the cutting there is to do). Pat Moynihan knew that and spent years trying to knock down the payroll tax level to the lower rate needed for true paygo financing, so the govt wouldn't squander the surplus that the '83 reform accidentally created ... though that's another story.

So maybe I have a different view on the "tax", aspect of things, but as to policy I agree with you for the other reasons you cite. Basically, it wouldn't work and would be a waste.

Except ... I dunno ... qualms like that seem against the spirit of the times. I mean, my mother is getting her share of that $14 billion for nothing -- what did she ever do?

I'm self-employed with a business and actually contribute to the economy. Why aren't us self-employeds respected as a lobbying group? Where's our take from all this "stimulus"??

I sure could use a 15.3% tax cut. It'd be real enough to me.




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