We shouldn't be raising the payroll tax - we should be cutting it, and offsetting the cost of the cuts with spending cuts (means-test benefits?) and/or other tax hikes that will be less economically destructive (cut the mortgage deduction? institute a value-added tax?). Either party could grab this - the payroll tax is a tax on employment, a burden on business that discourages job creation; a regressive tax on hard-working people trying to put food on their families that exempts dividend-clippers and other trust-fund scumbags; an inducement to hire undocumented immigrants who live in the shadows - there are GOP-friendly and Democrat-friendly arguments to cut or eliminate the payroll tax and fund our Social Security obligations in a more economically efficient manner (and then we could have a healthy debate about what that manner might be). There ought to be a bidding war over who will do more for payroll tax relief! Instead, we're going the other way.
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What Noah Millman said:
Comments (19)
I don't know why some principled conservatives haven't grabbed on to the carbon tax as a way of replacing the payroll tax. There's a legitimate objection to carbon taxes, in that we can't do proper cost/benefit analysis. Still, it seems that a tax that reduced output of a pollutant would be superior to a tax on jobs, which are pretty much an unmitigated good. 
OK, I'm stupid: what's the difference between income tax and payroll tax? Income taxes are paid by individuals. Payroll taxes are paid (in part) by employers, which raises the cost of adding people to the payroll and discourages job creation.
Tax cuts when the country enjoys a $482 billion deficit ... only in Republican fantasy land can that be possible.
Yes...and fund it with a carbon tax, please.
Democrat-friendly Instant zero weight on the opinion expressed. I would also note that Millamn has even less training on economics or public finance than 2X4 McArdle, who is viewed as an _econonmist_ on this middling site.
RS - corresponding spending cuts to pay for the tax revenue decrease - there's the rub, but that's the difference between Noah and GOPers who keep spending and cutting at the same time. Personally, I wish they'd cut spending first but it isn't as sexy to voters as refund checks. Savage View - I'd say Millman's line of work (banking) gives him quite an insight on this sort of thing, both because he sees the high-level implications of tax policy in the corporate world, and because he probably works alongside many trust-fund scumbags. Fund it with a carbon tax, but as has been pointed out elsewhere, the point of the carbon tax is to eventually minimize or eliminate carbon emissions, so I don't see that as a long-term alternative.
Ferrell - Spending cuts? America is at war in two foreign countries, and domestically the economy is tanking at the moment. Good luck finding fat to trim.
Two related problems with this sort of thing. First, spending cuts are always mentioned but never specified, while the tax cuts are put up front and specified. Basically, the GOP position is all the desert you want right now, and at some point in the future we'll give you some vegetables. For once I'd like to see one of these small government types say that "we need to cut programs x, y, and z by exactly this much, in this way. And doing so will allow us to pay for some tax cuts which we will determine later." Of course, that will never, ever happen, because all the major government spending programs are extremely popular with voters. So anyone who actually proposed a serious, concrete spending cut would immediately get hammered and voted out of office. See the Social Security privatization debacle recently for an example of that. This is why supposed fiscal conservatives like McCain just blather on about earmarks, as if they're more than random noise when it comes to federal spending. Because if he actually tackled any substantive government programs, he'd lose in Goldwater-esque fashion. And on the specifics here, cutting the mortgage deduction in the middle of a serious housing crisis? Now that seems like a case of the cure being much worse than the disease if I've ever seen one.
If I follow the logic of that link correctly, then we should in fact pay for this tax cut by raising taxes on the rich, since a payroll tax is "regressive". The solution is therefore a "progressive" tax, right? So Ross is in favor of increasing taxes for the rich? I'm marking this down on my calendar.
Freddie: OK, I'm stupid: what's the difference between income tax and payroll tax? Jeff: Income taxes are paid by individuals. Payroll taxes are paid (in part) by employers, which raises the cost of adding people to the payroll and discourages job creation. More fundamentally: Income tax is assessed on all taxable income -- wages and salaries, capital gains, interest, dividends, lotteries, winnings at the dog track, etc. Income tax is paid at a progressve rate: the more you make, the bigger percentage you pay. (Some income, most particularly capital gain income, gets a special rate.) Income tax is paid by human beings as well as corporations and some other kinds of business entities. Income tax is subject to all kinds of deductions and credits, including the standard personal deduction. Payroll income is only wage/salary income. Paid in part by employee and in part by employer. No deductions. Flat rate, subject to cap. So, on the one hand, you've got a tax with progressive rates that is assessed on businesses and on investment income -- that's the income tax. On the other hand, you've got a Grover Norquist fantasy of a flat tax -- the payroll tax -- which is totally flat (and capped!) and not assessed on investment income. To understand the way the federal government collects taxes, you have to look at both of these tax regimes together. To get a sense of the numbers, take a look at the federal government's receipts for 2007: Individual income tax = $1,163 billion
Is this a harbinger of the normalization of George W. Bush’s distortion of the language? hard-working people trying to put food on their families Just saying.
More hypocrisy from the Republicans, and crocodile tears for the working class. The Republicans cut the capital gains tax, so that returns from capital are taxed at a lower rate than returns from working. (It also distorts economic behavior, encouraging people to take compensation in the form of capital income rather than labor income). So we know what the Republicans' one true priority is: lower taxes for the rich.
So Ross is in favor of increasing taxes for the rich? I'm marking this down on my calendar. I don't see why that would be surprising. Ross is pretty much a tax-and-spend liberal at heart; he just thinks abortion is murder and rap music will lead to the fall of western civilization.
MHD, Re: latching on to a carbon tax... David Frum actually did just that, in his latest book.
a tax-and-spend liberal Mercy, you people are still tossing that tiresome catch phrase around? After eight years of the Bush, Jr. administration, let alone a fundamental grasp of finance, one would think that one would have died of natural causes. I'll take me some responsible "tax and spend" liberals over "deficits don't matter"* right wingers any day. *actual quote
My suggestion (which no one but me seems to like) is to eliminate all payroll taxes and substitute a single, flat-rate income tax, with no deductions or credits of any kind in its place. If you pressed me, I could live with a two rate system (all income up to $50,000 taxed at X% and all income over that at Y%). I don't know what the single rate would have to be to make up for the lost payroll taxes. Probably around 25% but that's just a guess. I don't have a clue whether this would change the distributional burden of taxes or not. Advantages: (1) Encourage employment by removing a tax on employment. (2) Eliminate free-riderism and encourage citizens to view themselves as part of a common polity: right now, a very large percentage of low-income tax payers pay little or no income taxes (even thought they are paying relatively high payroll taxes) and so they think that whatever programs the Government can provide for them are free. If all taxpayers are in the same boat, if they are all paying taxes at the same rate, they will all have the same incentives with regard to politicians' promises to give them something for nothing. (3) Eliminate the fiction that social security is some kind of insurance program, with benefits tied to payments into the system, and make clear that it's just another transfer payments (i.e., welfare) program. Disadvantages: Would be violently opposed by all kinds of special interests.
Labor and value-added are pretty much the same thing. Therefore, a VAT would have very similar incidence to a payroll tax.
"Labor and value-added are pretty much the same thing. Therefore, a VAT would have very similar incidence to a payroll tax." Perfectly true, but irrelevant here. For game theoretic reasons, this is a special case in which what matters is not the incidence (who ultimately carries the burden of the tax) but the impact (who pays the tax over in the first instance). The approach to helping unemployment suggested by Professor Kim Swales is basically a Negative Payroll Tax carried on the back of a VAT; if incidence were the only issue, it would all cancel out and have no effect. Yet a game theoretic analysis clearly highlights that it works as a Pigovian subsidy, a virtual one rather than an actual one since there is no funds outflow.
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OK, I'm stupid: what's the difference between income tax and payroll tax?
Posted by Freddie | July 28, 2008 6:18 PM