Let’s Turn the Payroll Tax Upside Down

For 2011, the payroll tax (Social Security tax) has been 4.2% rather than the customary 6.2% in the hopes that the extra money the government has let us put in our pockets would increase spending to boost the economy and create jobs.

President Obama wants to extend that special rate through next year, but is facing headwinds from Congress in a strange reversal of roles. Those same Republicans who at the end of last year insisted on retention of the steep Bush tax cuts now say that we cannot afford the $115 that the 2% trimming of the payroll tax would cost. Those same Democrats who tried to force revenue increases as part of the debt ceiling pact now are arguing for this revenue reduction. Republican House Leader Eric Cantor says that temporary tax cuts don't create jobs, only cuts that are “broad-based, immediate and permanent” as an op-ed piece in the Wall Street Journal said. That a tax cut which pertains to every employee’s paycheck throughout the land is not broad enough is a clear indicator that Republicans expect to make permanent the Bush tax cuts, which are also temporary, expiring at the end of 2012, and which would preserve cuts to all other income not subject to the payroll tax, particularly the 15% tax on capital gains and most corporate dividends.

When the 2% extension comes up for a vote by year-end, opposition is a risk for Republicans, who will effectively be voting for a tax increase on all lower level income earners. And it's not small change: The 2% reduction would give a family earning $50,000 an extra $1,000 to spend during next year. Twice that for a $100,000 family.

The payroll tax is our most regressive tax by far. A higher percentage of one’s annual income is paid by lower income workers than by those making higher incomes. That is because it is levied against every dollar earned by the average worker — but then it stops if and when anyone’s income during a calendar year passes $106,800, no matter how large that income becomes. The more money one makes, the less the tax as a percentage of income until it ultimately becomes infinitesimal. At the extremes, those investment bankers and corporate CEOs who are paid, say, $10,000,000 in a year — they’re done paying their Social Security tax on January 4th, after just three days on the job. And those who make most of their money from investments rather than a paycheck pay nothing at all.

Turn It On Its Head

Here’s a suggestion for the President. For all these years, ever since Social Security began, those who made more than the cutoff — this year’s $106,800 — have had a free ride on that extra income. During these difficult times when the payroll tax is so burdensome on the average citizen, whether 6.2% or 4.2%, why not turn the tables. Charge no payroll tax at all until the $106,800 is reached; then charge the 6.2% only on all income that exceeds that threshold.

It’s a perfectly fair idea that does something to redress the inequities that have favored higher income people for so long. Of course, it will go nowhere in Congress. But their protests and its defeat would demonstrate how Congress “coddles” those who make the most money, to use Warren Buffett’s word, and we would get to watch the comedy of whatever twisted logic they come up with to justify their opposition.

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