Making Payroll

Oh, and while we’re on the topic of taxes and fiscal responsibility, I notice that John McCain has decided to join Barack Obama at least partway by contemplating a payroll tax increase. Can I say right now that this is a really bad idea?

First of all, Social Security isn’t in nearly as much trouble as all of us thought. It would take only minor tweaks – modestly raising the retirement age, for example – to get the program into good shape. You want to see an entitlement in trouble, go next door and check out Medicare – which, I will note, doesn’t have an earnings cap.

Second, for decades now we’ve been funding the general budget with payroll taxes. But it’s somehow morally wrong to fund Social Security with general federal revenues? Why, exactly? What is the principle here?

Third, Obama’s proposal is to raise the cap on wages that are subject to FICA. That’s probably what McCain is “putting on the table” as well; indeed, the Bush Administration put it on the table when it was trying to get private accounts passed back in early 2005. Do these proposals contemplate increasing benefits to upper-income seniors as well? Presumably not. So, basically, we’re talking about just creating a new tax – on high-wage-earners – to increase revenues. Right? So why, specifically, use the payroll tax? Just because maybe then people won’t notice that Social Security is part of the regular budget? And people who fret about marginal tax rates won’t notice that this is a big tax hike on upper-income earners?

Meanwhile, take any poll of economists and they will tell you: the payroll tax is among the most economically destructive taxes around, specifically because it is a tax on wages. I mean, if we’re trying to soak the rich to pay benefits to seniors, why on earth would we specifically target wage-earners and exempt the idle rich?

We shouldn’t be raising the payroll tax – we should be cutting it, and offsetting the cost of the cuts with spending cuts (means-test benefits?) and/or other tax hikes that will be less economically destructive (cut the mortgage deduction? institute a value-added tax?). Either party could grab this – the payroll tax is a tax on employment, a burden on business that discourages job creation; a regressive tax on hard-working people trying to put food on their families that exempts dividend-clippers and other trust-fund scumbags; an inducement to hire undocumented immigrants who live in the shadows – there are GOP-friendly and Democrat-friendly arguments to cut or eliminate the payroll tax and fund our Social Security obligations in a more economically efficient manner (and then we could have a healthy debate about what that manner might be). There ought to be a bidding war over who will do more for payroll tax relief! Instead, we’re going the other way.