O’Connell Factor: Payroll ‘Em Up

Posted by Freddie on November 16, 2006 under Uncategorized |

Come January, you’re not going to be able to turn on Fox News without hearing about the Democratic plan to raise your taxes. You’re probably already hearing about it from Rush, Hannity, and so forth. So I’ll take the bait and just assume that American tax policy is up for review, and I’ve got a proposal for Democrats that should appeal to the majority of working Americans: eliminate the payroll tax cap.

If you are or ever have been an employee, chances are you’ve seen a line for FICA withholding on your pay stub. And you’ll notice that that line doesn’t increase your take-home pay. What you might not realize, though, is that someone in your company who earns considerably more than you, might not actually have a much higher FICA responsibility. Yup, you only pay FICA on approximately the first $90,000 of your wages each year. So anyone earning a comfortable six-figure salary only has to worry about payroll taxes for that uncomfortable first 5 digits’ worth. Imagine! The message is, “Work hard enough, and we’ll let you off the hook for taxes! You’re stimulating the economy so hard, we don’t even want your money!” If income taxes worked this way, I suspect the working class would’ve revolted by now.

The only problem is we’ve got this thing called Social Security and this other thing called Medicare, and in order to ensure their solvency we need to collect revenue. So I say, what’s not to like? It’s a flat tax, which conservatives touting fairness are ready to push on American taxpayers faster than Grover Norquist can say “Drown it.”

The only sticky wicket is the question of whether those who pay more in get more out when collecting benefits down the road. My proposal would preserve the cap on the benefit side as-is, while removing it for collection. So if I’m earning $500,000 (which I’m not, for the record), I pay my payroll taxes on the full $500,000, but I receive Social Security benefits as if I had paid payroll taxes on the first $90,000.

If Republicans and their free-speech-loving campaign contributors don’t like it, here’s an alternative proposal: offer to replace the Bush tax cuts with an elimination of the payroll tax altogether. That’s right: let the sunset clause on the Bush tax cuts to date go ahead and set, and then propose a follow-on massive $700 billion tax cut that ends a regressive form of taxation affecting millions of working Americans, including the self-employed. Hang on, did the Democrats just call for a tax cut approaching $1 trillion?! They sure did! Heck, they could even provide an expiration date just like the president did.

Tax policy is not for the faint of heart. But now is a time for strategic boldness on the part of Democrats, many of whom, like our own congressman Jim Cooper have been nervously watching our deficit. And negotiation over the payroll tax offers Democrats a clever method of extending the longevity of Social Security benefits at a minimum and possibly a bold way to lessen the burden of taxation on working Americans that should stimulate the economy more than any rebate did. Mr. Bush thought Americans saw taxes as a priority. We do, Mr. President. But we’re tired of watching your tax policy benefit only the lives of your major donors.

(hat tip: Robert Reich, who understands and argues on behalf of tax policy changes better than I likely ever will.)