Making the Payroll Tax Cut Revenue-Neutral

President Obama and Republican leaders are currently debating whether or not to extend the 2011 Social Security tax reductions for one more year.  The usual Social Security payroll tax is 6.2% on all income under $110,100.  In 2011 that was reduced to 4.2% for one year only.

The cut arose from a deal last December.  The Republicans agreed to lower payroll taxes on people with five-figure incomes for one year but cutting the Social Security tax.  The Democrats agreed to lower income taxes on people with six, seven, and eight figures incomes for two years by extending the 2001 Bush tax cuts.

So here we are in December 2011 debating the extension of the five-figure payroll tax cuts without the leverage of expiring income tax cuts on the six, seven, and eight figure salaries.  Poor strategy?  Doubtless.  No one outside the White House has accused the Obama administration of good strategy.

Without the expiry of the 2001 Bush tax cuts as a bargaining chip, some interesting horse trading is now in progress on Capitol Hill.

[pullquote]Without the expiry of the 2001 Bush tax cuts as a bargaining chip, some interesting horse trading is now in progress on Capitol Hill.[/pullquote]

The House Republicans have demanded that any extension of the payroll tax cut be offset by the building of an oil pipeline, the 327-mile Keystone XL pipeline from Alberta to Nebraska.  What an oil pipeline has to do with payroll taxes is anyone’s guess.  It smacks of Washington business as usual.

The Republicans also want a pay freeze for federal workers through the end of 2013.  The Republican party has been at war with federal workers (27% of them unionized) for decades.  Federal workers are an easy target for pay freezes: they’re not allowed to strike.

The third major plank in the House Republican bill is an increase in Medicare charges for America’s elderly.

As a concession, they’re willing to bar millionaires from collecting unemployment insurance and food stamps.  Call it the Jon Corzine provision.  Don’t forget: Corzine may be a recently unemployed investment banker, but he’s still a Democrat.

How should we pay for an extension of the 2011 payroll tax cut?  We should make it permanent by making everyone pay payroll taxes at the same rate.  A flat tax for Social Security.

[pullquote]We have to choose between a tax break for those making over $110,100 a year or a tax increase for those making over $110,100 a year.[/pullquote]

In 2012, American workers will pay Social Security payroll taxes only on their first $110,100 of wages.  For most Americans, that’s all of their wages.  Only a lucky 10% of Americans make more.

If that lucky 10% of the American population were forced to pay payroll taxes on all of their wages, it would generate over $100 billion more every year than the current regressive tax.  In other words, it would about pay for extension of the payroll tax cut.  A progressive tax on social security — in which the rich pay a higher proportion of their income — could actually generate revenue.

No one wants to pay taxes.  But when we have to choose between a tax break for those making over $110,100 a year or a tax increase for those making over $110,100 a year, the choice is clear.  It’s time to make Social Security a flat tax.  A rate of 4.2% for everyone is fairer than 6.2% for the working class and less and less for the rest.