Tax arguments: You CAN have it both ways – If you’re talking about different things

There’s taxes, and then there’s taxes.

Jazz Shaw and Ed Morrissey have a debate going at Hot Air over what would be a consistent political position for Republican lawmakers, as they consider (a) the payroll tax holiday set to expire on 1 January 2012, and (b) the income tax rates scheduled to increase on 1 January 2013.

Jazz argues that it’s inconsistent to make the economic impact of a tax hike the overriding concern when it comes to income tax rates, but dismiss the economic impact of an increased tax load when the subject is ending the payroll tax holiday.  He points out that the Bush tax rates were passed with an expiration date, and therefore were temporary in a sense similar to the scheduled expiration of the payroll tax holiday.

There is an extent to which this argument is valid, but it’s a very limited one.  The reason is quite simple:  the two tax issues are different.  They are different on both the paying and the receiving end – and in their impact on the economy.

Income taxes are paid on “taxable income” from earnings (wages, salaries, dividends) and annuities (e.g., retirement plans).  The rate of taxation goes up as taxable income increases.  That’s on the paying end; on the receiving end, income taxes provide the largest single source of general revenues for the federal treasury.

Payroll taxes – Social Security and Medicare – are paid on base salary.  The rate is the same for all income levels (currently 7.65% for an employee, matched by his employer; 15.3% for self-employed), up to the maximum taxable earnings figure, which this year is $106,800.  (It is going up next year to $110,000.)  The payroll tax holiday has reduced the withholding for the self-employed and for employees – not for employers, who still pay their 7.65% per employee – by 2 percentage points.  On the receiving end, the payroll tax revenues go to the Social Security and Medicare trust funds.

Basically, those who are fine with ending the payroll tax holiday are simply asking workers to go back to making their full contribution to the Social Security and Medicare programs.  Jazz is correct in saying that this will mean more current money out of the pockets of taxpayers who earn up to $110,000 a year.  For that $110,000-a-year earner, the payroll tax bill will increase by $2200, or about $180 a month.  It will increase by less at each lower level of income.

An increase in the income tax rate – and in particular, the expiration of the Bush tax code – would have a more significant economic impact, in that it would hit everyone from lower-middle to the highest income levels with an increased tax load.  Besides reinstituting the “marriage penalty” and reducing child tax credits, an expiration of the Bush tax code would tighten tax brackets – subjecting people in the lower-middle and middle range to a higher rate – and increase the rate on higher incomes and capital gains.

These latter effects are the ones that suppress economic expansion the most. Short of violating the laws that protect everyone, you can’t make the rich poor by taking their money from them – but you can force them to restructure their finances so that it’s less taxable.  The rich can choose to take less income, hold assets in the least-taxable forms, put their money overseas, and so forth.  And every time they do, they invest and spend less in the US.

The payroll tax doesn’t affect these dynamics of the economy.  Of course, for those with the FDR-era Keynesian view that consumption drives the economy, the idea that wage-earners will see an average total of $1000 less in their paychecks next year (about $83 a month) means taking that $1000 per earner out of circulation for consumption purposes.

Those who see it differently would point out that the payroll tax holiday has already cost Social Security $105 billion in revenues – and it has done that in the first year in which Social Security paid out less than it took in.

Social Security is a separate program; unlike the all-but-unintelligible situation of general revenues and expenditures, with Social Security, we can tell what effect we’re having on the program by paying less into it.  But if having to contribute to Social Security is too much of a burden on us, then let’s restructure it already, and schedule transitions to a different basis for the program in the future, while keeping our commitments to today’s seniors and those close to retirement.

What smart earners have been doing with their payroll tax holiday savings is, well, saving.  Or, very possibly, investing.  We’ve had the holiday for a year now, and it hasn’t had any noticeable accelerating effect on consumption, or on the economy as a whole.  If it’s that important to have a payroll tax holiday, then let’s go big.  Let’s have a payroll tax holiday of 5 percentage points for 10 years, suspending federal taxes on investment returns from the amount previously withheld; and let’s reform Social Security and Medicare at the same time.  In 10 years, we can have a viable plan for the future of both programs, putting them back on a “needs” basis and leaving more current money in the pockets of earners, because the programs can be paid for out of general revenues, and perhaps – if necessary – a 1-2% payroll tax.

And we’ll have a whole lot of people with bigger, better investments for their own futures – and a whole lot of investment capital built up for the economy.

J.E. Dyer’s articles have appeared at Hot Air’s Green Room, Commentary’s “contentions,Patheos, and The Weekly Standard online.

18 thoughts on “Tax arguments: You CAN have it both ways – If you’re talking about different things”

  1. I know this is an important post, BUT no college football to write about on Friday is a downer. I knew the day would come. Darker days to follow (especially after the Insight.crap bowl).
    One bit of gossip. Texas A&M contacted Mike Gundy’s agent before hiring Sumlin.
    Mike’s contract is going to end soon. The money men at OSU are actually jerking him around about his contract. After what he has accomplished???????
    They think Gundy will always stay, no matter what. People are incredulous here.
    You are talking some real backwoods, small time stuff there.

    1. I do like OSU over Stanford and I suspect relatively decisively. Stanford has not chance of stopping them although the Cardinal should be able to score some.

  2. This Bush Tax Cut argument is silly. The “Bush Code” has appallingly high rates and unfathomable complexity. Yes, repeal would make it worse. Still, preserving it would only make for a slightly better arrangement of the deck chairs on the Titanic.

    What’s called for is some nice mixture of Switzerland and Singapore. Pure yuminess with skyrocketing economic growth and super low unemployment. Yippy.

  3. The answer is to reduce all taxes on the middle-income group. This money is more likely to be ploughed back into the domestic economy and provide a beneficial stimulus to USA inc. The Bush income-tax holiday should be extended for those earning less than $100K for the same reason. But extending it for the very wealthy will only benefit hedge funds and the coffers of the Cayman Islands.
    This is exactly what the President has proposed.

  4. Are you flying a false flag, Paulite? A supposed libertarian pimping for a more progressive tax? (It’s progressive right now, just not progressive enough for the liberals.) By the way, there is no Bush Income Tax holiday, except perhaps for a few marginal folks in the lower income groups who ended up paying nothing when they used to have to cough up a couple of dollars. Those corporations like GE and upper income individuals who pay no taxes are taking advantage of other aspects of the tax code.

    I may also disagree with our host a bit. Getting more money in your paycheck leads to increased spending, which leads to increased profits for the people who sell stuff, which may encourage them to add a job or two, etc. I would be very surprised if most of the payroll tax rollback didn’t get spent on current consumption — since those workers have probably already taken pay cuts. The problem is what you do to restore the Social Security “trust” fund. If we try to restore that money with higher taxes, we will just choke off any stimulus that we created. We should say: you paid less in, that means there will be less to take out when the time comes. That postpones the drain on the economy (lower Medicare and SS payments) to a time when good Keynesians hope that the economy will be much healthier.

    Well, that’s not the only problem. Constantly tinkering with taxes causes uncertainty, which causes businesses and potential entrepreneurs to sit on their wallets.

    Actually getting Congress to do a comprehensive reform of entitlements is still looking like science fiction to this observer.

    1. Cancel your subscription to “The Economist” and quit reading Krugman’s blog in the NYT. You’ve got the the sequence backwards. Getting more money doesn’t lead to more jobs, it leads to inflation. Look at one significant part of the economy, cell phone service. Thirty years ago there was no such thing. Then companies invested money, money that had been saved, in development and infrastructure to provide a service that people were willing to pay for. The Dept. of the Treasury didn’t need to print any new money to give to people so that they could wave it at Sprint and entice them to erect cell phone towers all over the country. Sprint was willing to gamble that their service would prove to be so valuable to consumers that they would willingly fork over enough cash to recover their investment and some profit besides. And they were right.

      The idea that free market capitalism runs on consumer spending is a perversion of economics. No economy can operate for any but the shortest period of time without savings, wealth that is invested in capital for later production.

  5. I’m all for a very simple flat-rate income tax to pay for whatever is necessary to run USA inc. This would see everyone paying their fair and proportionate share. However, the tax code is riddled with special breaks, exemptions, and rebates which in reality only the very well-off can avail off (That is why the mega-rich who fund the GoP were so unhappy with Herman the Vermin’s flat-rate tax proposal. It was predicated on the abolition of all these special tax-breaks, and would have seen the mega-rich paying the same proportion of their income in tax as ordinary middleclass people)

    However, as long as we have all these special exemptions for the rich, a progressive income-tax regime is unavoidable if we are to avoid the situation of the middleclasses carrying disproportionate burden of funding the nation.

    We could also improve everyone’s fiscal position by avoiding future trillion buck wars of choice.

    1. Paul, please list all tax exemptions/credits that are available to wealthy people and not to ordinary Americans.
      Please define Rich please.
      Please list all exemptions that are available to middle income folks and not to wealthy Americans.
      Please define middle income Americans.
      Please list all exemptions for poor folks not available to middle income and wealthy folks.
      Please define poor.
      The top 5% of earners pay about 40% of federal taxes.
      The botton 45% pay no income taxes. Do you think 45% of Americans are under the poverty level? I bet a large majority of these folks take advantage of tax LOOPHOLES to diminsih their taxes.
      The middle 50% of earners pay about 60% of Federal Income Taxes. We also take advantage of every LEGAL tax credit, deduction,write off, etc. etc.
      The Home Mortgage Interest Exemption available to everyone that finances a home has helped millions of families since World War II. It indirectly helps State and local govts because they TAX the same homes to pay for schools and infrastructure. You know roads and stuff.
      Paul, there is a simple thread that runs through all you posts: “I like this, but I don’t like that. These people are good, those people are bad. I like this rule, I don’t like that rule. This is cool, that is not. I feel sympathy for these people, I hate those people.” Throw a fact out there every once in a while Paul. Read an article, grab a magazine, open your front door and let the light in once in a while.
      But please, never hesitate to let the world know who you feel sorry for every day. Superiority does does breed contempt, but also sympathy for lessors of the world. One has to be in a superior position to feel true sympathy.
      I will have mine with lettuce and tomato and just a touch of mayo. Bloody if you please. That Paul is the non-Do Gooder special. Boobus Americanus is with mustard and the Special Paranoia Sauce. When you take the top off, you are sure someone else is having more fun than you. Maybe at your expense. But, maybe they would do well even if you didn’t exist.
      I reserve the last wispy, tangential,pseudo, partial, all encompassing, maybe retort to you. I also give you a special dispensation to use Factoids if you wish. The true definition of a factoid is: Something that appears in print that is not true, but the author thinks should be true. Thus, if the said factoid is repeated often enough it will become true for various groups that need the factoid to be true. After a while anyone that openly declares the factoid is not true becomes a Heretic. You Paul, would lead the mob to clear the Progressive Temple of Heretics. So shall it be written, so let it be done.

    2. The top 1/10 of 1% pay more income taxes than the bottom 80%. Wreed is incorrect in citing the 45% figure. It was 47% in 2007 and I’ve seen the figure of 51% in 2009 but am not certain about it.

      One of the reasons revenue had dropped is that there are fewer “rich” people and they make less money. Still, even the Obama Depression is generating enough revenue to fund the Republican government of 2004, a government fighting two wars that was anything but parsimonious on domestic spending.

    3. And of course one should but never quite can contain one’s amazement at the monumental hypocrisy and immeasurable greed of Democrats. There are the virtually countless current and former members of the current administration who have used every trick in the book.

      The distinguished Democratic ticket of 2004 is yet another case in point. That tribune of the poor John Edwards took very special care to pay as little in taxes as possible and maintain himself in extravagant luxury even as he railed against the “rich” (i.e. people who may have made less than a 20th of his money by honest means rather than the predatory shysterism of the trial bar). John Kerry, too, who has almost never made (and certainly never earned any money) and lives in almost unspeakable luxury thanks to the $$ inherited by his wife too very good care to make sure that the state he represents not be able to collect taxes on “his” yacht by placing the latter in Rhode Island (this again broaches this issue of the merits of such taxes but we can do that later).

      1. Kerry and his wife were humiliated by the public outcry and moved the boat and paid some taxes. They had to. They got caught. They were forced to. They complied because they underestimated the intelligence of common people.
        The Democratic Brahmins and wealthy Republicans are much the same.
        The 45% of people not paying taxes is not a static number. It depends on the year and recording method and who you trust at any given moment. I do not have the apparatus to canvas and track Federal Tax Returns. If you have independently certified the exact percent from the 2010 tax period I yield to your expertise and accounting/polling methods.
        Oh yes. What difference does it make if its 45% or 47%. It is a sizable number. It is not a good number.
        The point is too many people pay no taxes while top earners are pilloried for not paying enough.

        1. That is exactly the point but it is made that much more forcefully the higher then #.

          Hardly expertise. The 47% has been quoted in multiple WSJ editorials with reference to IRS data.

          The bottom line though is that our tax system is hyper-progressive. Most good “Progressives” while not always explicitly enthusiastic about the former USSR and Cuba tend to wax poetic about the high, “progressive” tax rates in Sweden and the very generous welfare state the fund. Even with those progressive income taxes and even including payroll taxes (and OC describes the distinction in this very post) the top 10% pay 45% of all taxes in the U.S. and only 27% in Sweden (the generous welfare state of left-wing fantasy being funded by much much higher income and payroll taxes on the middle class and, of course, the very high and highly regressive VAT).

          Whatever the case, lack of progressivity in the tax system is not our problem and indeed its excess is one of its principal flaws.

        2. And yes the Kerrys had to pay the taxes but by no means of their (or at least his) own volition even though the advocacy for higher taxes has been as consistent a feature of the Senator’s career as his desire to cut any an all defense procurement programs.

  6. You are correct that there are at least some Republicans, certainly many of those in government, who are reluctant about a flat tax because it would limit the power of government and their ability to steer policy, wether social or economic, in the directions they wish to see it move. To be sure, Republican control would be quite dramatically better than that of Democrats but still very problematic, especially in the way it would resemble that of the latter, such as perhaps the continual, absurd and immoral (even if not as aggravated) support for “Green Energy”.

    It is also, of course, the case that many Republicans fear the preposterous accusations of favoring the rich and engage in the futile effort to redistribute income in the hope that they will get some credit. It is this kind of futile thinking that induce George W. Bush to abandon his original idea for a 30% top rate to be instituted immediately and make his original much inferior and much delayed 2001 proposal and motivates Romney’s current argument for preserving the Bush rates and the attempt to join Obama’s half war. Needless to say, they are trading superior policy for no political benefit.

    It is is thus easy to understand why some Republicans are willing to follow in the Democrats footsteps of pursing aggressive class war with and “taxing the rich” even as they give brakes to preferred individuals and groups.


    1. PART III

      All of the above might induce even those Republicans who nominally support a flatter tax oppose when there is a real chance of actually enacting it. Still at least many of the propose and a good portion of these actually would enact it if given the chance.

  7. It’s interesting that so much commentary here and elsewhere is concentrated on customizing the tax code, especially income tax, an abomination that the nation flourished without for over half of its history, to remedy government deficits when slashing spending is the only real answer. There is no justification for a Department of Agriculture. Everything that is done by the Dept. of Agriculture can and should be done by the parties involved. Farmers and agribusiness can finance their own export programs. Commodity subsidies are a violation of the free market. Even with heady times for agriculture, with commodities and farmland skyrocketing in price all over the country, the Dept. of Agriculture budget has increased over 60% since 2008 to $149 billion in 2011. This is an insult to any sentient being. The US Congress has zero credibility when they continue to pass out imaginary money to loyal constituencies, of which agriculture is just one of many.

  8. Well done Mr. President. The Housed Republicans overreached and misread the mood of the great American people yet again.

    Happt Christmas everyone.

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