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How payroll taxes expose Republicans' fundamental anti-tax hypocrisy How payroll taxes expose Republicans' fundamental anti-tax hypocrisy
(6 months later)
With the release last week of President Obama's 2013 budget, the single issue that continues to divide Democrats and Republicans – and prevent a budget deal from being reached – has been brought into stark relief. Even though the president has attempted to meet the GOP more than halfway by proposing cuts to social security and Medicare (enraging his liberal supporters in the process), the demand for additional tax revenues remains a bridge too far for House Republicans.With the release last week of President Obama's 2013 budget, the single issue that continues to divide Democrats and Republicans – and prevent a budget deal from being reached – has been brought into stark relief. Even though the president has attempted to meet the GOP more than halfway by proposing cuts to social security and Medicare (enraging his liberal supporters in the process), the demand for additional tax revenues remains a bridge too far for House Republicans.
"Higher taxes are a chill on job creation," "they place an unfair burden on working-class Americans" and they "slow economic growth" … at least, this is the refrain we can expect to hear from Republicans, particularly on Monday 15 April or, as it is better known, "tax day"."Higher taxes are a chill on job creation," "they place an unfair burden on working-class Americans" and they "slow economic growth" … at least, this is the refrain we can expect to hear from Republicans, particularly on Monday 15 April or, as it is better known, "tax day".
Yet, the Republican rhetoric on taxes is an odd one – because the fact is, for the vast majority of Americans, their income taxes are not really all that onerous. Indeed, nearly half of all Americans won't even pay income taxes at all this year. For those who do pay, their current tax burden is more progressive (that is, with the rich paying more of their fair share) than at any point in recent memory; while the burden itself remains historically low.Yet, the Republican rhetoric on taxes is an odd one – because the fact is, for the vast majority of Americans, their income taxes are not really all that onerous. Indeed, nearly half of all Americans won't even pay income taxes at all this year. For those who do pay, their current tax burden is more progressive (that is, with the rich paying more of their fair share) than at any point in recent memory; while the burden itself remains historically low.
In reality, the greatest tax burden on Americans comes due not in April, but rather, every two weeks, when they receive their paycheck – in the form of payroll taxes.In reality, the greatest tax burden on Americans comes due not in April, but rather, every two weeks, when they receive their paycheck – in the form of payroll taxes.
Payroll taxes, which are used to fund social security and Medicare, are the taxes that every American pays out of his or her salary. These levies account for approximately 35% of all federal revenues; they consume close to 17% of worker salaries; and for three out of every four households, they represent a larger portion of their tax responsibility than dreaded, hated income taxes.Payroll taxes, which are used to fund social security and Medicare, are the taxes that every American pays out of his or her salary. These levies account for approximately 35% of all federal revenues; they consume close to 17% of worker salaries; and for three out of every four households, they represent a larger portion of their tax responsibility than dreaded, hated income taxes.
Funny, you don't hear Republicans complain much about those taxes.Funny, you don't hear Republicans complain much about those taxes.
There's a good reason for that – working-class and middle-class Americans bear the greatest burden from payroll taxes. Income taxes, on the other hand, because they are progressive and thus increase the more money you make, take a bigger hit out of wealthy Americans.There's a good reason for that – working-class and middle-class Americans bear the greatest burden from payroll taxes. Income taxes, on the other hand, because they are progressive and thus increase the more money you make, take a bigger hit out of wealthy Americans.
Which goes to prove, as if we didn't know already, that Republicans don't really care about taxes … they care about rich people paying taxes.Which goes to prove, as if we didn't know already, that Republicans don't really care about taxes … they care about rich people paying taxes.
Indeed, the anti-tax rhetoric of the GOP and, let's be honest, many Democrats, has left many Americans furious about income taxes, but somewhat inured to payroll taxes. The reasons are many: if one works long enough, they simply take for granted that take-home pay will be lower than actual salary; or voters lump payroll taxes in with income taxes under the hated "tax" moniker; or perhaps, voters understand specifically how payroll taxes are being used – namely, to fund their share of the entitlement programs of which they will be recipients after retirement.Indeed, the anti-tax rhetoric of the GOP and, let's be honest, many Democrats, has left many Americans furious about income taxes, but somewhat inured to payroll taxes. The reasons are many: if one works long enough, they simply take for granted that take-home pay will be lower than actual salary; or voters lump payroll taxes in with income taxes under the hated "tax" moniker; or perhaps, voters understand specifically how payroll taxes are being used – namely, to fund their share of the entitlement programs of which they will be recipients after retirement.
What is far less understood is that the burden of payroll taxes shows up in other ways – most specifically, the way they lower wages. While every worker must contribute to the social security and Medicare trust funds (6.2% to the former; 1.45% of the latter), so, too, must employers. But these contributions are offset by reduced wages, which means that workers take on virtually the entire financial burden of payroll taxes. It's even worse for self-employed workers who must pay the entire 15.3% of employee and employer contribution to social security and Medicare all by themselves.What is far less understood is that the burden of payroll taxes shows up in other ways – most specifically, the way they lower wages. While every worker must contribute to the social security and Medicare trust funds (6.2% to the former; 1.45% of the latter), so, too, must employers. But these contributions are offset by reduced wages, which means that workers take on virtually the entire financial burden of payroll taxes. It's even worse for self-employed workers who must pay the entire 15.3% of employee and employer contribution to social security and Medicare all by themselves.
In addition, payroll taxes are fundamentally unfair – or, to be more accurate, regressive. So, for example, under the current system, every American pays the same percentage of payroll taxes up to approximately $113,00 (this is just for social security; there is no limit on Medicare payroll taxes). But if your income is higher than $113,00, that responsibility ends.In addition, payroll taxes are fundamentally unfair – or, to be more accurate, regressive. So, for example, under the current system, every American pays the same percentage of payroll taxes up to approximately $113,00 (this is just for social security; there is no limit on Medicare payroll taxes). But if your income is higher than $113,00, that responsibility ends.
So, if you happen to be a gazillionaire, you don't pay a cent in additional payroll taxes for the money you make between $113,000 and a gazillion. This is one of the reasons, for example, why Warren Buffet's secretary famously has a higher tax percentage than her boss – or why Mitt Romney's tax burden was around 14%.So, if you happen to be a gazillionaire, you don't pay a cent in additional payroll taxes for the money you make between $113,000 and a gazillion. This is one of the reasons, for example, why Warren Buffet's secretary famously has a higher tax percentage than her boss – or why Mitt Romney's tax burden was around 14%.
Another reason is the corollary to the GOP's anti-income tax agenda – the push for low capital gains taxes, corporate taxes, dividend income taxation, carried interest loopholes, and other tax breaks for wealthy Americans.Another reason is the corollary to the GOP's anti-income tax agenda – the push for low capital gains taxes, corporate taxes, dividend income taxation, carried interest loopholes, and other tax breaks for wealthy Americans.
Conversely, working- and middle-class Americans don't just get hit by payroll taxes; they pay state and local taxes (generally regressive); property taxes (yup, same there, too); and user fees imposed by states and the federal government that are more burdensome the poorer you are. In fact, according to one estimate, the poorest Americans pay more in taxes on alcohol and tobacco than they do in federal income taxes.Conversely, working- and middle-class Americans don't just get hit by payroll taxes; they pay state and local taxes (generally regressive); property taxes (yup, same there, too); and user fees imposed by states and the federal government that are more burdensome the poorer you are. In fact, according to one estimate, the poorest Americans pay more in taxes on alcohol and tobacco than they do in federal income taxes.
In short, the tax system, percentage-wise, takes a greater bite out of those who make less than it does from those who make more. That, by and large, imposes a greater burden on work than it does on income. This is great if you make your money off investment income or capital gains; but if your salary comes strictly from wages, not so much.In short, the tax system, percentage-wise, takes a greater bite out of those who make less than it does from those who make more. That, by and large, imposes a greater burden on work than it does on income. This is great if you make your money off investment income or capital gains; but if your salary comes strictly from wages, not so much.
Yet, Washington is rarely focused on the burden of payroll taxes. For Democrats, it's about protecting social security and Medicare. Their concern in lowering payroll taxes (which were, until 2011, the only US taxes never to be lowered) is that to do so would weaken the funding mechanism for these two social insurance programs. Indeed, when President Obama floated the idea of further extending a payroll tax holiday (it had already been reduced as part of the deal to continue the Bush tax cuts at the end of 2010), some liberals resisted the move for fear that it would become permanent.Yet, Washington is rarely focused on the burden of payroll taxes. For Democrats, it's about protecting social security and Medicare. Their concern in lowering payroll taxes (which were, until 2011, the only US taxes never to be lowered) is that to do so would weaken the funding mechanism for these two social insurance programs. Indeed, when President Obama floated the idea of further extending a payroll tax holiday (it had already been reduced as part of the deal to continue the Bush tax cuts at the end of 2010), some liberals resisted the move for fear that it would become permanent.
The other fear is that to reduce or weaken the explicit connection between taxation and social security and Medicare will undermine support for the programs. As the argument goes, if Americans no longer see and feel a direct connection to these vital social insurance programs (that is, "I pay taxes and a couple decades later, I get paid back"), it will undermine their support for them.The other fear is that to reduce or weaken the explicit connection between taxation and social security and Medicare will undermine support for the programs. As the argument goes, if Americans no longer see and feel a direct connection to these vital social insurance programs (that is, "I pay taxes and a couple decades later, I get paid back"), it will undermine their support for them.
This is a dubious notion since, by this point, support for social insurance programs are pretty well ingrained in the political system. Nonetheless, it's an idea that drives support for the maintenance of the payroll tax and at its current levels.This is a dubious notion since, by this point, support for social insurance programs are pretty well ingrained in the political system. Nonetheless, it's an idea that drives support for the maintenance of the payroll tax and at its current levels.
Still, the payroll tax holiday was extended in 2012 and was done so over the opposition of Republicans. Now, the idea of the modern Republican party opposing a tax cut – any tax cut – is about as unheard of as George W Bush engaging in genuine self-criticism. And yet, for weeks in late 2011 and early 2012, Republicans held up the payroll tax. They claimed continuing the tax cut would explode the deficit and needed to be paid for with offsetting spending cuts – a complaint and demand that they've never made about income tax cuts.Still, the payroll tax holiday was extended in 2012 and was done so over the opposition of Republicans. Now, the idea of the modern Republican party opposing a tax cut – any tax cut – is about as unheard of as George W Bush engaging in genuine self-criticism. And yet, for weeks in late 2011 and early 2012, Republicans held up the payroll tax. They claimed continuing the tax cut would explode the deficit and needed to be paid for with offsetting spending cuts – a complaint and demand that they've never made about income tax cuts.
Republicans also said it wouldn't grow the economy or create jobs, even though it would do both things better than a break on income taxes. Even the famously anti-tax Wall Street Journal derided the payroll tax cut as an "inferior cut" and complained that it was not "broad-based or immediate", even though it clearly would be.Republicans also said it wouldn't grow the economy or create jobs, even though it would do both things better than a break on income taxes. Even the famously anti-tax Wall Street Journal derided the payroll tax cut as an "inferior cut" and complained that it was not "broad-based or immediate", even though it clearly would be.
Eventually, the GOP relented in the face of growing criticism and a fear that their position would undermine them politically at the polls in November. But when the payroll tax deadline came again at the end of 2012, they made no effort to extend the cut further – even though it meant a tax increase for working Americans, and one that wasn't necessarily outweighed by the continuation of lower income taxes that were part of the Bush tax cuts.Eventually, the GOP relented in the face of growing criticism and a fear that their position would undermine them politically at the polls in November. But when the payroll tax deadline came again at the end of 2012, they made no effort to extend the cut further – even though it meant a tax increase for working Americans, and one that wasn't necessarily outweighed by the continuation of lower income taxes that were part of the Bush tax cuts.
Truth be told, Democrats didn't make much of a fuss either, as they were again worried that a further reduction in the payroll tax cut would undermine social security and Medicare. The result is that Americans saw their taxes go up in 2013, by about $1,000 a year for the average American, even as President Obama and Republicans were bragging that they'd cut taxes on the middle class. In reality, they helped to raise them.Truth be told, Democrats didn't make much of a fuss either, as they were again worried that a further reduction in the payroll tax cut would undermine social security and Medicare. The result is that Americans saw their taxes go up in 2013, by about $1,000 a year for the average American, even as President Obama and Republicans were bragging that they'd cut taxes on the middle class. In reality, they helped to raise them.
There is one solution to such a problem: create a doughnut hole in the social security cap. In other words, for those making between, say, $113,000 and $250,000, they won't have to pay the 6.2% social security tax. For those making above $250,000, the tax would kick back in. Doing so, while reducing the payroll tax burden for those making below $113,000, would put more money in their pockets, would give a boost to the economy and might even create a few additional jobs.There is one solution to such a problem: create a doughnut hole in the social security cap. In other words, for those making between, say, $113,000 and $250,000, they won't have to pay the 6.2% social security tax. For those making above $250,000, the tax would kick back in. Doing so, while reducing the payroll tax burden for those making below $113,000, would put more money in their pockets, would give a boost to the economy and might even create a few additional jobs.
Above all, it would lower the tax burden on working-class Americans.Above all, it would lower the tax burden on working-class Americans.
But that would mean raising taxes on wealthy Americans. And we all know Republicans could never allow that to happen.But that would mean raising taxes on wealthy Americans. And we all know Republicans could never allow that to happen.
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