Government Spending

Why Not Abolish Payroll Taxes Altogether Instead of Screwing Around With a Short-Term, Low-Percentage Cut?


So the House hath rejected the Senate's genuinely useless payroll tax cut plan. Here's what the World's Greatest Deliberative Body (read: League of Ordinary Gentlemen) proposed:

The Senate's short-term, lowest-common-denominator approach would renew a 2 percentage point cut in the Social Security payroll tax, plus jobless benefits averaging about $300 a week for the long-term unemployed, and would prevent a 27 percent cut in Medicare payments to doctors. The two-month, $33 billion cost would be financed by a 0.10 percentage point hike in home loan guarantee fees charged by mortgage giants Fannie Mae and Freddie Mac, which the administration says would raise the monthly payment on a typical $210,000 loan by about $15 a month.

You got that? In order to pay for a FICA tax cut, they would ding homeowners. The House had passed legislation that was slightly different in terms of paying for the continued payroll tax cuts but mostly different in that it extended the cut through the end of the fiscal year:

The House passed a separate plan last week that would have extended the payroll tax cut for one year. But that version also contained spending cuts opposed by Democrats and tighter rules for jobless benefits.

Both the House and Senate bills included a provision designed to force Obama to make a decision on construction of the controversial Keystone XL pipeline, which would deliver up to 700,000 barrels of oil daily from tar sands in Alberta, Canada, to refineries in Texas. The provision requires him to issue the needed permit unless he declares the pipeline would not serve the national interest.

There is no reason to believe that the payroll tax cut has been job-creatin' or stimulative in any meaningful sense of the words. Yes, it's better to pay less in taxes but absent any cut in Social Security benefits, we all know that the current reduction simply means higher taxes (and/or bigger benefit cuts) down the road.

Here's an idea: Let's stop the fiction of "payroll taxes" altogether. FICA taxes are sucked out of every dollar of earned income from dollar one through around $110, 100 (starting in 2012); they are split between employer and employee and the total comes to a touch over 15 percent. Ostensibly, these funds go to cover Social Security and Medicare. But that's not really true in either case. Social Security's "trust fund" has been raided for a very long time to pay for general government outlays and, more recently, doesn't provide enough cash to cover day-to-day expenses anyway. The funds collected for Medicare were never intended to cover the full costs of that program and they just keep falling far shorter every day.

Let's be adult and admit that "payroll taxes" are just another form of income tax; it's a mental dodge to pretend call them by a different name. If they were named accurately, perhaps it would allow us to discuss spending more accurately too. If we want a payroll tax "holiday," then why not actually kill the taxes altogether? What sort of vacation from reality are we getting by trimming 2 percentage points anyway? What a strange time for a government that borrows more than 40 percent of every dollar it spends to miser out!

And let's be even more adult and try not to spend more than we're willing to pay for. I'm not even being brave or super-principled in suggesting that. The bill's going to come due some day and it's not going to be any easier when we're older. As we've shown here at Reason, it actually wouldn't be that tough over the next decade or so to bring revenues and expenses in line with one another. Indeed, if we kept spending to 19 percent of GDP (more than it was at the end of the Clinton presidency), outlays and revenue would match up. It requires small (3.6 percent) year-over-year cuts from a federal tab that has basically doubled over the past decade-plus.

I know it's nuts to suggest that the government, like living, breathing human beings, should live within its means, but it's really all I want for Christmas.