Matt Miller - The Archives
A tax cut we need—but won't get
The Washington Post, September 8, 2010

Ask any economist or businessperson what kind of tax cut would be the biggest boost to job creation and the answer is clear: a cut in payroll taxes, because it would directly reduce the cost of employment.

Ask any social justice champion which tax is the unfairest tax of all and the answer is clear: the payroll tax, because on the employee side it is 6.3 percent of wages up to a cap of $106,800, thus taking a bigger bite, proportionally, out of a dishwasher's paycheck than a CEO's.

So which tax has the Democratic White House decided it won't propose cutting as part of its last-ditch scramble to convince voters before November that it's serious about jobs?

The payroll tax.

If this doesn't make sense to you, you're paying attention. And you're beginning to see why the president's latest economic rescue plan has been held hostage (again) by his party's confusion and fear.

As The Post reported Tuesday, "The White House has decided to forgo a broad-based payroll-tax holiday at this point. . . . That proposal, which had been part of earlier discussions with key congressional officials, would have been an expensive measure. . . . It also could have deprived Social Security of needed cash even as Democrats are accusing the GOP of plotting the program's demise on the campaign trail."

Translation: The one tax cut that could have immediately created jobs (and gained bipartisan support—Indiana Gov. Mitch Daniels (R) proposed a payroll tax cut on Wednesday) has been declared off-limits because it would muddy the Democratic message that Republicans are out to destroy Social Security. Democrats think they need this scare tactic to get their otherwise unmotivated voters to the polls to contain November's coming damage. And so the lure of demagoguery on Social Security has won out over the prospect of creating jobs.

In the long run, the Democrats' policy confusion is worse. They remain in thrall to the ancient link between payroll taxes and Social Security, even though this tie now undermines progressive goals. They act as if FDR came down from Mount Sinai with those FICA deductions for Social Security etched in stone. To be sure, this link brilliantly made Social Security seem like "insurance" for which workers had paid (though they pay for current retirees and don't store up money in some "account" of their own). It assured, in FDR's famous phrase, that "no damn politician" could ever mess with his legacy.

It was an inspired idea—75 years ago. But to cling to it today is like expecting FDR to have honored Abraham Lincoln's policy playbook in the 1930s.

When Social Security began, payroll taxes were just 1 percent. Today, between the employer and employee contributions, and including the smaller sums that help fund Medicare, they're 15.3 percent. The payroll tax has quietly soared from 2 percent to 33 percent of federal revenue since World War II—meaning it now brings in nearly as much as the individual income tax, which accounts for 43 percent. When you include the employer's matching payments, which effectively come out of wages, most families pay more in the regressive, job-killing payroll tax than in income tax.

There's generational inequity, too. Thanks largely to payroll taxes, which apply only to those working for a paycheck, a young family earning $35,000 pays much more in federal taxes than a retired couple with the same income.

You'd think a tax with so many problems would have politicians clamoring to fix it. But they're scared off by the assumed link between payroll taxes and Social Security. Cutting the former seems to imply cutting (or at least monkeying with) the latter, which remains one of the chief taboos of modern politics.

For now, then, the reckoning is depressing. Cutting payroll taxes today would create jobs outside Washington; leaving payroll taxes untouched may help protect some Democrats' jobs inside Washington.

As can't be noted often enough, the boomers' retirement will force us to transcend this insanity, since we'll urgently need to boost economic growth even as taxes as a percentage of GDP rise in an aging America. The most promising answer is a kind of grand tax swap, in which we cut taxes on payrolls and corporations, and raise them on dirty energy and consumption.

This rethinking is inevitable, even if political reflexes die slowly. The demographic tsunami ahead—the only wave out there that may be bigger than the one Democrats face in November—will wash away today's archaic premises like a cleansing tide.

If we could start the conversation now, though, we'd have millions more jobs and avert needless human suffering. Is it really so unthinkable that America's dysfunctional political culture would try?