Bloomberg News

How Higher Taxes for a Few Lightens Load for All: Phil Keisling

November 07, 2011

Oct. 31 (Bloomberg) -- On Jan. 1, 2012, almost every working American will be hit with the biggest tax increase of his or her lifetime. That’s when the Social Security payroll tax will revert to its pre-2009 rate of 6.2 percent, from 4.2 percent now.

This post-Christmas lump of tax coal -- under a provision of the 1935 Federal Insurance Contribution Act, known as FICA -- will take effect as the country struggles with 9 percent unemployment, record home foreclosures, and an economy teetering on the edge of a double-dip recession.

A full-time worker, making the federal minimum wage of $7.25 an hour, will pay $290 more a year. For a teacher, construction worker or nurse making $50,000 annually, the increase will be $1,000. A two-income family, in which each spouse makes $106,500 or more, will be whacked for about $4,240.

Although it targets just 2 percent of payroll, this 30 percent increase in tax rates packs a $120 billion annual wallop. Unlike the federal income tax, with its myriad deductions and exemptions, FICA fully taxes the very first dollar of each worker’s pay, including the self-employed.

Only Congress can act to prevent this huge tax increase. Fortunately, there is a readily available solution that Congress -- or better yet, its bipartisan supercommittee -- can and should make law within the next 75 days.

Another Option

To finance even a one-year extension simply by adding to the deficit would be both fiscally irresponsible and illegal. Under last summer’s debt-ceiling deal, Congress would need to enact $120 billion in additional spending cuts this fiscal year to offset extending the tax. Slash defense spending? Medicare insurance subsidies? Veterans’ benefits? Even for the most ardent followers of the Tea Party movement, that would be political suicide.

Fortunately, another option is as obvious as it is politically elegant. Congress should enact a one- or two-year temporary increase in income taxes on the top 1 percent to 2 percent of American households to finance a similarly temporary extension of this payroll tax cut for 99 percent of working Americans.

Of course, President Barack Obama and the Democrats might see more immediate appeal here than congressional Republicans, who, in any case, have maintained an eerie silence about the enormous “job killing” potential of this particular tax increase. (A case in point is former Massachusetts Governor Mitt Romney, for example, who said in the Bloomberg News-Washington Post debate of Republican presidential candidates on Oct. 11 that Obama’s proposal to extend the FICA employee tax cut was only a “temporary little Band-Aid.”)

But this tax swap should have broad, bipartisan appeal, especially if we ask ourselves this: What kind of tax cut would Americans prefer to keep -- even if only temporarily -- as the economy claws its way back to prosperity? Or, put differently: Which tax increase, this January, truly poses the “least bad” choice for the economy?

Here’s how it would work: In December 2010, Congress extended the FICA payroll tax cut, but only through Dec. 31, 2011. Separately, the Bush-era tax cuts, including those for the wealthiest taxpayers, were extended until Dec. 31, 2012.

Congress should simply “trade” some expiration dates. Extend the looming FICA tax cut until at least Dec. 31, 2012. Then temporarily “pull forward” -- to Jan. 1, 2012 -- the reversion to pre-Bush era income tax brackets for top-end taxpayers, effective for the same time period.

Just Semantics

When it comes to Social Security and Medicare, politicians of both parties often resort to politically convenient semantics, such as assertions that FICA levies are more like “contributions” than taxes.

Nonsense. At their core, FICA payroll levies and federal income taxes are both mandatory taxes. Working Americans --wage- earners and independent business owners alike -- have to pay them, under penalty of law.

Likewise, Social Security and Medicare are both government spending programs, just like thousands of other, income tax financed programs (including Medicare, which drew $203 billion last year from this source). Indeed, both Republican and Democratic deficit-reduction plans now account for these FICA- financed spending programs (and the revenue from the tax) in the same way as all other federal government spending programs.

Expect some liberals to squawk about the “temporary” nature of such a tax increase, while some conservatives lob accusations of “class warfare.” But consider this: Most of the 4 million U.S. households with adjusted gross incomes above $200,000 will still be net winners from this “Tax Hike for a Tax Cut” deal.

A 2 percent FICA cut reduces every worker’s tax on the first $106,500 of wages. Raising an upper-level income tax bracket to 36 percent from 33 percent (in a joint return) only affects taxable income above $250,000 adjusted gross income. For a working couple, each paying the maximum FICA Social Security tax, the “break even” point is about $390,000 adjusted gross income -- which probably means $450,000 (or more) of total household income.

By syncing these three expiration dates -- for this temporary income tax increase, the FICA tax cut and the other Bush-era income tax cuts -- Congress and/or its supercommittee can then propose which, if any, of these various changes to keep, modify or abandon post-2012.

So for the next month or two, let’s mute the tiresome partisan shouting match about taxes versus spending cuts. Instead, let’s focus on the defining choice of what kind of tax cut Americans need and want right now.

And with some luck -- and political compromise on both sides -- this debate will set the stage for the kind of truly comprehensive tax and budget reform that Americans and our staggering economy need even more.

(Phil Keisling, director of Portland State University’s Center for Public Service, served as Oregon secretary of state from 1991 to 1999. He is also a contributing editor of the Washington Monthly magazine. The opinions expressed are his own.)

--Editors: Max Berley, Stacey Shick

Click on “Send Comment” in the sidebar display to send a letter to the editor.

To contact the writer of this article: Phil Keisling at keisling@pdx.edu.

To contact the editor responsible for this article: Max Berley at mberley@bloomberg.net.


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