Five Ways To Fix The Payroll Tax Cut

The White House and a divided Congress are stuck in another stale debate over the best way to stimulate the economy. This time they’re arguing over how to pay for a 2 percent (Republican offer) or 3.1 percent (Obama administration proposal) payroll tax cut, and how to pay for extended unemployment benefits for the long-term jobless.
 
In keeping with the populist image President Obama has adopted since slipping seamlessly into re-election mode, he wants to impose a surtax on the incomes over $1 million. The Republican-led House, meanwhile, has called for a pay freeze for all federal workers, although they are now looking at other alternatives.

There are problems with both approaches. Taxing the rich has popular appeal at a cultural moment when the tri-cornered Tea Party hat has been replaced by the 1% v. 99% placards of the Occupy Wall Street movement. But why give Warren Buffett a $3,410 tax break (3.1 percent on his first $110,100 of income next year) in the first place?

And while it’s popular in some circles to pick on public employees, they are consumers, too. If the government takes money previously earmarked for their salaries to help pay for lower taxes for everyone else, the net benefit to the economy is zero. It simply transfers spending from one group of workers to another.

Here are five better ways to fix the payroll tax cut – ones that put more of the money into the economy immediately, and replace the lost revenue with tax measures that will reduce the nation’s long-term deficit.

1. Target the payroll tax relief. The Obama administration’s stimulus plan included a Make Work Pay tax credit, which went to individuals or families earning up to $75,000 or $150,000 a year. Doubling that tax break would cost about the same $112 billion as a 2 percent tax cut, and deliver more money to families in the bottom 80 percent of the population – people who, unlike those earning over $150,000 a year, are more likely to spend it immediately.
2. Target the payroll tax relief, option two. Instead of a 2 percent or 3.1 percent across-the-board cut, phase it in. People earning under $50,000 a year could get a 3 or 4 percentage point cut, while people earning above that would get 1 or 1.5 percent cut. It would cost the same, but it would be targeted to those most likely to spend the cash immediately.
3. Don’t give as much tax relief to the really well-off, thus lowering the cost of the program. Right now, anyone who earns more than $110,100 next year will not be taxed for Social Security on his or her income above that amount. Since those relatively well-off folks are slated to get the same payroll tax break as everyone else on the first $110,100 of income, some or all could be recaptured from earnings over that amount. A special Social Security surtax equal to the size of the tax cut (2 or 3.1 percent) would be levied on earnings over the cap. People who earn $220,200 a year or more will wind up repaying the entire tax cut.
4. Or, even better, simply lift the cap on taxable earnings that is subjected to Social Security taxes. If Congress and the president insist on giving well-off people the same payroll tax break on the first $110,100 of earnings that everyone else gets, isn’t about time to lift the cap so more income from upper middle-class and well-to-do is taxed for Social Security in the first place?
    In the early 1980s, 90 percent of the national income pie was taxed to support the nation’s retirement system. But because of the growth in income inequality, and more and more of total income going to high-end earners, that figure is now down to 83 percent. The Congressional Budget Office says raising the cap to a level where it once again taxes 90 percent of all wages (about $170,000 a year in 2012) would raise $467.8 billion over the next decade. That’s enough to pay for a payroll tax cut – and go a long way toward fixing Social Security, too.
5. Want to pick on public employees? Do it in a way that gives them something in return by bringing everyone under the Social Security umbrella. Right now, about 25 percent of public employees across the country are not part of the system. Include them and it would raise $96 billion over the next decade, according to the Congressional Budget Office.