The truth is that payroll taxes fund government spending generally. We ought to eliminate the ruse that payroll taxes fund social security, eliminate the payroll tax and roll it into the income tax. Then we could give the middle class a better tax cut than they get now.
Roberts is not on the Kerry team, but this strikes me as the best advice on tax policy that Kerry is likely to get.
For Discussion. What are the economic and political ramifications of Roberts’ proposal?
READER COMMENTS
Joe Kristan
Jul 29 2004 at 2:37pm
It would result in a significant increase in the marginal rate. If it only affected the individual income tax, it would be a serious tax increase on the tax rate for small and mid-sized businesses. Many such businesses avoid FICA (13% and Medicare (2.9%) on much of their income because they are set up as S corporations (see the mini-flap about John Edward’s law-practice income). Similar results apply to certain partnership interests.
If you think marginal rates matter (I do), you would conclude that the proposal would be bad for smaller businesses and the economy in general.
Tom Grey
Jul 29 2004 at 3:36pm
It’s terrible. While it’s somewhat true that all money the gov’t gets goes into one pot, and all money they spend comes out of that pot, the more separation of different taxes for different benefits, the more likely it is to reduce some.
Privatizing social security is MUCH easier, and more likely, with the clear payroll tax amount. Instead of it going into the one gov’t pot, it could be sent into a private account. Already the below average income folk basically do not pay income tax — so they’re all in favor of higher income taxes (on the rich!).
The middle class don’t need a tax cut, exactly. They need to know that they’re paying for their own education, house mortgage, and health benefits — not using Other People’s Money. The natural desire to use gov’t to collect OPM, and use that cash for your own benefit, is the dirty secret corruption at the heart of democracy, and the cause of democracy failures, when they fail.
(See Tax Loans for an alternative) Also, payroll taxes DO fund Soc. Security; but since there’s still a surplus, it’s the surplus that funds other benefits. It’s “broken” because benefits will have to be cut, or taxes raised, for the payroll taxes to continue the funding. As I write I am convinced the real desire to do this is to make income taxes (on the rich!) pay for middle class entitlements.
Bad idea. Bad, bad, bad.
Mr. Econotarian
Jul 29 2004 at 8:57pm
I agree with doing away with the payroll tax. It is worst for poor people in their 20’s struggling to make something of themselves.
Imagine if instead of putting away $20,000 during your 20’s into Social Security to get a 1% return (if you live long enough), that person spent the money on a college education.
The truth is that the payroll tax HAS been done away to some extent. The Earned Income Tax Credit (EITC) gives back some payroll tax to the poor, especially if the have children (I haven’t quite figured out why we are using tax policy to encourage poor people to have kids they can’t afford, but I digress…)
Yet the EITC doesn’t cover a lot of slightly better off people with no kids, and it certainly doesn’t make a lot of sense to take away with one hand all year and give back with another in June.
Lawrance George Lux
Jul 29 2004 at 9:09pm
I could propose an expansion to the Payroll tax which no one could like: absolute insistence that brokerage firms take out withholding, with Everyone forced to file adeqate returns to get whatever was their own back. This would cure Budget woes, with the IRS as first Recipient. I can at least scare the Rich.
Elimination of the Payroll tax would allow for standardization of SS benefits, which would save in longrun costs–until the Public demanded higher benefits anyway. lgl
Don Lloyd
Jul 29 2004 at 9:10pm
Shifting the payroll tax into the income tax will result in the double taxation of existing tax-deferred savings as post-payroll-tax savings put into IRAs or 401Ks will be hit again with the increased income tax rate.
Regards, Don
Robert Schwartz
Jul 30 2004 at 12:02am
Bad idea. The income tax is too highly leveraged to economic conditions. Read the NYTimes Article I.R.S. Says Americans’ Income Shrank for 2 Consecutive Years and click on the chart “For the Wealthiest, the Biggest Declines.” Almost all of the decline was in the $200K+ brackets. Money Quote:
The problem is that the Income tax is too highly leveraged to economic conditions and is too costly to collect.
Boonton
Jul 30 2004 at 10:37am
Actually the 20 year old is probably a pretty good candidate to pay some taxes. S/he is young, has a lifetime of income to look forward to and BTW, they probably already got a college education thanks to gov’t loan subsidies!
Lawrance George Lux
Jul 30 2004 at 12:08pm
It seems I must always be the Devil’s Advocate here: There is some belief on my part that the disparity between Rich and Poor is extended by the implementation of the 401k system. Capital Gains tax once took pressure off the working Poor in terms of tax burden. Those capable of utilizing the 401k system lifted the tax burden from themselves until Retirement. This shifted the tax burden onto those who could or would not utilize the 401k system.
One now examines the 401k system for economic advantages. Would there have been a significant reduction of Investment? Not likely given the degree of Corporate internal financing, and the development of the modern banking system. Would there have been as much pressure on Wages without the system? Again not likely given the taxes would have increased, while the working Poor would not have been so constrained by Prices. Would the level of Household Savings decreased without the 401k system. There is every reason to believe the largesse of such Savings would have decreased, but the percentage of Savings to Household Income would have increased–among both Poor and Rich Households.
I believe in Tax Policy Economics which considers bad tax policy by Legislaters to be the greatest detriment to economic performance which exists. lgl
Mr. Econotarian
Jul 30 2004 at 11:17pm
I say do away with taxation either pre or post savings, as long as those savings are not pulled out until after retirement.
It isn’t the trees that are messed up with tax policy and social security it is the whole forest. Great simplification is required. We have become the victim of too many schemes that create entrenched kingdoms.
DSpears
Jul 31 2004 at 10:38am
No tax reform will ever happen in this country until income tax withholding is abolished. As long as people never see the money in the first place they don’t understand how much they are paying. If you had to write a check to the government every month or once a year, and budget that money just like your mortgage, you would realize just how much money is going to the government. That’s why witholding was invented, fraudulent “effciency” arguments aside.
The idea that different taxes go for specific programs is one of the biggest scams in government history. There is no social security “lockbox”, just a file cabinet in Washington. It all goes into the general fund. Anybody who tells you different is a liar.
Lawrance George Lux
Jul 31 2004 at 2:30pm
DSpears,
You are right about tax reform only coming with elimination of Income tax withholding, but wrong in the ideology. Tax reform will only be useful, if and only if, Government spending can be constrained. I have justed posted a Blog entry on another site, where I examined the White House projection of the deficit at $445b. I played with it some, and came up with numbers of $552b for the fiscal year–$680b if Social Security were in a Lockbox. I also commented that the White House projections through 2009 would require an economic growth rate through the entire Period in excess of 6% per year. lgl
Boonton
Jul 31 2004 at 4:45pm
If done correctly, ‘lockboxes’ can and do work in the sense that they keep money dedicated to a specific program. They are accounting devices and accounting devices are useful.
DSpears
Aug 1 2004 at 8:28am
“If done correctly, ‘lockboxes’ can and do work in the sense that they keep money dedicated to a specific program.”
Want to buy a bridge? I’ve got some swamp land to sell too.
“…..accounting devices are useful.”
…for political trickery and deceit. How ironic that these are the same people who took it upon themelves to “fix” the accounting practices of the private sector.
“Tax reform will only be useful, if and only if, Government spending can be constrained.”
OK, I’m listening, who exactly is going to do that? Of the the 536 elected officials in Washington I can’t name one who is willing to tackle that most worthy goal.
Once upon a time the “Contract with America” proposed to eliminate the departments of education (which doesn’t educate anybody), the department of energy (which doesn’t produce any energy) and the department of commerce (which restrains instead of encourages commerce). I never tire of reminding people that Spencer Abraham introduced a bill in the Senate to eliminate the department of energy. If that name looks familiar it’s because he now heads that agency and has almost doubled it’s budget in 3 years. It’s amazing what happens when job loss (losing and election) and the prospect of not having an important job in Washington meets up with ideology and campaign promises. Guess which one will always lose?
The point is that no matter how wide-eyed and ideologically pure a newly elected member of congress is, now matter what promises he made to get elected, he will be swallowed up by the Washington machine. If your not a criminal when you go to jail, you’ll be one by the time you get out.
I don’t put any hope into the idea that income tax witholding will be eliminated in my lifetime either by the way.
Lawrance George Lux
Aug 1 2004 at 2:49pm
DSpears,
I agree with you totally, but see some promise in the future. Outside events will force reform. A serious Economic studies group today proposed in the NYTimes to devalue the Dollar to 23% of its current worth, in order to correct the current Trade and Debt inbalance. No mention of the fact of living costs increases for Americans by such devaluation, nor the impossibility of such posture given the increased expenditures by all elements of the Economy. Everyone is so stupified by the current quadmire, even good people sanction idiocy. lgl
Mark L. Jackson
Aug 3 2004 at 5:57pm
I have long believed that your paycheck and every reciept you get should show the amount of the check that is going to taxes. Including hidden taxes such as: payroll taxes paid by the employer, and taxes on supplies (steel for cars, leather for seats etc..), and sales taxes.
Possibly if people could see how much the governemt steals from them they would be more apt to stop voting for the taxing idiots they elect.
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