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$700-Billion Balancing Act


I’ve got great holiday news for you. Starting as soon as possible, you’ll be relieved of payroll taxes on the first $20,000 of your income.


The tax holiday will last two years. That means about $5,000 extra to your family, if you’re a typical two-earner household. Ballpark cost to the government over the two years: $700 billion. How to pay for it? Repeal President Bush’s estate tax cut, which will also cost around $700 billion if made permanent.


Don’t get too excited yet. First, you and I need to convince Democrats that this is a smart move and strike fear in the hearts of enough Republicans to get it passed and signed.


Bush has a different plan, of course. His goal is to make permanent his whopping $1.35-trillion tax cut, including the estate tax cut.


Republicans love forcing Democrats to vote for or against tax cuts. It puts Democrats into a Republican box. Bush did it last year, and it worked. Having lost both houses of Congress in recent years, Democrats should have learned their lesson. Avoid the Republican box. Instead, force Republicans into a Democratic box. Make them choose between a payroll tax cut for more than 130 million working families or a tax cut for the richest 2% of American families. If Republicans are too dumb to choose a payroll tax cut over an estate tax cut, Democrats should blast them.


Everyone hates taxes, but the payroll tax is about the worst. Four out of five American workers pay more in payroll taxes than they do in income taxes.


The payroll tax is also regressive; poorer workers pay proportionately more. It’s paid out of the first dollar earned, all the way up to a threshold that’s now about $80,000. After that, nothing.


Wealthy earners pay only the tiny Medicare portion of the payroll tax on all their earnings. So the very rich finish paying early in the year. Microsoft Corp. Chairman Bill Gates is done a few minutes past midnight, Jan. 1.


True, poorer retirees get back more each year from Social Security and Medicare than do richer retirees relative to the taxes they contributed when they worked. But poorer retirees don’t live nearly as long; so overall, the system is still regressive.


At the end of World War II, only 2% of federal revenue came from payroll taxes; now, it’s 37%. The estate tax, on the other hand, is almost a mirror image of the payroll tax: 98% of American families don’t come near it, because it now affects only people who die with a net worth of more than $1 million. A quarter of all estate taxes came from just 467 families, each of whom was worth more than $20 million. We’re talking about the super, super rich.


A payroll tax cut would be a boon to the economy, stimulating more spending just when we need it. If you hadn’t noticed, the economy is almost comatose. The Federal Reserve Board can’t get it moving even after 12 rate cuts because there aren’t enough customers for all the goods and services that can be produced. The best way to get consumers to buy more is to put more money in their pockets.


And since employers would no longer have to pay their share of payroll taxes, they’d have an extra incentive to keep more people on their payrolls. The Bush estate tax cut gives more money to a handful of rich families who already spend as much as they want.


Anyone worried that a payroll tax cut would hurt Social Security or Medicare doesn’t understand federal budgeting. Every tax dollar the government collects is the same as every other dollar. Repeal the estate tax cut and prevent it from becoming permanent and the federal government gains $700 billion, making up for the $700 billion it loses by cutting the payroll tax for two years.


Framing it as a choice between the two cuts also draws public attention to the scandal of the widening gap of income and wealth in the United States over the last two decades.


Democrats had no message in 2002 and paid the price. Bush had a tax cut and a war on terrorism. You can’t fight something with nothing.


If Democrats want to win back at least one chamber of Congress and have a fair chance of regaining the White House in two years, they’ll have to fashion a tough but humane foreign policy along with a plan to get the economy moving.


Most important, they’ll need to remind Americans what’s at stake: a democratic society that offers the world a model of equity and opportunity or one run mainly by and for people at the top.


Robert B. Reich, a former secretary of Labor, is a professor of social and economic policy at Brandeis University and the founder and national editor of the American Prospect.

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