Cut payroll taxes?

One idea to help the economy–advocated by members of both parties–is  to cut payroll taxes, that money deducted from your paycheck.  Here is the case for that from liberal economist Nouriel Roubini:

A much better option is for the administration to reduce the payroll tax for two years. The reduced labor costs would lead employers to hire more; for employees, the increased take-home pay would boost much-needed economic consumption and advance the still-crucial process of deleveraging households (paying down credit card debt and other legacies of the easy-credit years).

Most policy approaches, including the Obama proposals, have tended to subsidize the demand for capital rather than the demand for labor. That has the problem backward. In the second quarter, capital spending reached an annual growth rate of 25 percent. The argument that increased demand for capital leads to greater demand for labor (i.e., if you buy more machines you need workers to run them) has not held up. Firms are investing in capital goods, equipment and offshore offices that allow them to produce the same amount of goods with less — and lower labor costs. To avoid a chronic increase in the unemployment rate, we need to subsidize the demand for labor — achieving job creation — rather than making it cheaper to buy capital, as investment and other tax credits would do.

President Obama could fully fund the reduction in payroll tax by allowing the Bush tax cuts for people making more than $250,000 a year to expire. Meanwhile, the Bush-era cuts affecting middle- and low-income earners — the vast majority of Americans — would remain in place for the time being. . . .

To maximize the incentives for private-sector hiring, there should be sharper reductions to the payroll taxes paid by employers than for those paid by employees. This will counter the argument that the higher income taxes funding these payroll tax cuts will hurt the wealthy and small businesses (many of which are run by those same high-income individuals) and their willingness to hire. Moreover, any cut in the payroll tax reduces the costs of operation and labor for all businesses. Other targeted policies that induce smaller banks to lend to small and medium-size businesses may be needed.

Low-income workers have historically shown a much higher propensity to consume when given extra money, so the payroll tax cut should be designed to provide a larger-percentage break to those on the low end of the income scale compared with the upper middle class.

via Nouriel Roubini – What America needs is a payroll tax cut.

About Gene Veith

Professor of Literature at Patrick Henry College, the Director of the Cranach Institute at Concordia Theological Seminary, a columnist for World Magazine and TableTalk, and the author of 18 books on different facets of Christianity & Culture.

  • Joe

    Cut payroll taxes – yes that would be a very good idea. However, limiting it to two years is just plain stupid. Companies will not respond to this if they think it is a very short term reduction. They will just enjoy paying lower payroll taxes on their current employees. Or if they do hire, they will reduce the work force in two years when the taxes go back up. In that two year period of time, the new employees will learn enough to replace the older current employees. The newer employees will be cheaper (less time in service = lower wages) and the older employees will be the ones who lose their jobs.

    Also, can we stop talking about reducing taxes as a subsidy. Taking less of my money by force is not a subsidy. Its just taking less of my money. If you have 20 dollars in your wallet and I decide not to take it have I given you anything? No.

  • Joe

    Cut payroll taxes – yes that would be a very good idea. However, limiting it to two years is just plain stupid. Companies will not respond to this if they think it is a very short term reduction. They will just enjoy paying lower payroll taxes on their current employees. Or if they do hire, they will reduce the work force in two years when the taxes go back up. In that two year period of time, the new employees will learn enough to replace the older current employees. The newer employees will be cheaper (less time in service = lower wages) and the older employees will be the ones who lose their jobs.

    Also, can we stop talking about reducing taxes as a subsidy. Taking less of my money by force is not a subsidy. Its just taking less of my money. If you have 20 dollars in your wallet and I decide not to take it have I given you anything? No.

  • http://www.bikebubba.blogspot.com Bike Bubba

    Um, if directing money to the poor is such a good idea, why haven’t all those billions that have been spent in foreign aid to poor nations made them prosperous? Why haven’t the trillions spent on the War on Poverty transformed the inner city? Why didn’t the Depression end prior to Pearl Harbor?

    Reality here is that prosperity follows productivity, and productivity follows capital formation. It’s time for a return to classical economics–one that understands that printing money and giving it to the poor doesn’t help anyone. It’s positively harmful to the poor!

  • http://www.bikebubba.blogspot.com Bike Bubba

    Um, if directing money to the poor is such a good idea, why haven’t all those billions that have been spent in foreign aid to poor nations made them prosperous? Why haven’t the trillions spent on the War on Poverty transformed the inner city? Why didn’t the Depression end prior to Pearl Harbor?

    Reality here is that prosperity follows productivity, and productivity follows capital formation. It’s time for a return to classical economics–one that understands that printing money and giving it to the poor doesn’t help anyone. It’s positively harmful to the poor!

  • Digital

    I was under the impression that Trickle down Economic theories were outdated…
    The only paragraph here that made sense was the last one where the lower classes are more apt to spend.

    In reality large corporations and the Upper class have financial advisers, investors, and a propensity to gain more assets. In other words they, on average, are fiscally responsible. Which is what the lower classes spend their time complaining about. “Companies are just pocketing the cash”, “The Rich just get richer, it isn’t fair”. We tend to paint this picture that all rich people are like painted on our favorite sitcoms. Essentially we make it a social taboo to be a saver, to be prosperous. So we invent new ways to tax prosperous folk and curb this crazy idea.
    If you want to bolster jobs, you have to bolster consumer spending. Right now average saving per household is around 4-6% which is dismal. People are learning a lesson, just like kids, you have to let them hit bottom and dig out so they know how to avoid things in the future. In this situation we have to get the savings back to a healthy 8-10% which is where it was historically. AFTER we get back to that then consumers will start spending in a smart way. Check out this chart.
    http://www.creditwritedowns.com/2010/02/chart-of-the-day-u-s-savings-rate-over-last-60-years.html
    The reason we are in the mess is that when the cycle went down there was no consumer savings to cover the dip (notice the dips in the savings rate on a regular basis?). Which causes bankrupcy, which causes foreclosures…
    In the end what we need to do is help the lower classes save money, encourage savings by giving incentives, something like a government match for dollars saved, or really nice interest rates on CDs. Put an income cap on the incentive like there is for Roths.
    This will help fix the economy, and fix it permanently. It will also teach the american public a lesson their parents SHOULD have taught them years ago.

  • Digital

    I was under the impression that Trickle down Economic theories were outdated…
    The only paragraph here that made sense was the last one where the lower classes are more apt to spend.

    In reality large corporations and the Upper class have financial advisers, investors, and a propensity to gain more assets. In other words they, on average, are fiscally responsible. Which is what the lower classes spend their time complaining about. “Companies are just pocketing the cash”, “The Rich just get richer, it isn’t fair”. We tend to paint this picture that all rich people are like painted on our favorite sitcoms. Essentially we make it a social taboo to be a saver, to be prosperous. So we invent new ways to tax prosperous folk and curb this crazy idea.
    If you want to bolster jobs, you have to bolster consumer spending. Right now average saving per household is around 4-6% which is dismal. People are learning a lesson, just like kids, you have to let them hit bottom and dig out so they know how to avoid things in the future. In this situation we have to get the savings back to a healthy 8-10% which is where it was historically. AFTER we get back to that then consumers will start spending in a smart way. Check out this chart.
    http://www.creditwritedowns.com/2010/02/chart-of-the-day-u-s-savings-rate-over-last-60-years.html
    The reason we are in the mess is that when the cycle went down there was no consumer savings to cover the dip (notice the dips in the savings rate on a regular basis?). Which causes bankrupcy, which causes foreclosures…
    In the end what we need to do is help the lower classes save money, encourage savings by giving incentives, something like a government match for dollars saved, or really nice interest rates on CDs. Put an income cap on the incentive like there is for Roths.
    This will help fix the economy, and fix it permanently. It will also teach the american public a lesson their parents SHOULD have taught them years ago.

  • http://www.bikebubba.blogspot.com Bike Bubba

    Digital, you’re arguing simultaneously for a recovery led by capital formation (savings) and consumer spending. See the contradiction?

    You are correct that real recoveries are led by capital formation, incorrect on the latter. The correct explanation is, ahem, more or less….

    Trickle down. It’s not outdated, it’s simply an expression, somewhat modified, of classical economics.

  • http://www.bikebubba.blogspot.com Bike Bubba

    Digital, you’re arguing simultaneously for a recovery led by capital formation (savings) and consumer spending. See the contradiction?

    You are correct that real recoveries are led by capital formation, incorrect on the latter. The correct explanation is, ahem, more or less….

    Trickle down. It’s not outdated, it’s simply an expression, somewhat modified, of classical economics.

  • Digital

    Bubba@4
    Not a contradiction, I just didn’t explain it well.
    Capital formation leads to consumer spending. Right now people have learned the valuable lesson of why savings are important. If you don’t have savings, you lose your house.
    So what you have now is people wanting to get savings back. I look around in my personal life (Nebraska) where the economy did not hit us as hard, but everyone is being conservative and trying to save. So we are all avoiding spending with the exception of buying new houses, that just made sense.
    So I am looking at a longer recovery, everyone wants things to be fixed right now. We need Joe Sixpack to learn his lesson, replenish or create his savings, then he will be in a better position to spend. If we encourage spending right now, we will diminish savings and be right where we are again when the economy dips. The quicker we get people to save, the quicker they will start spending again.
    Did that clear up the contradiction for you?

  • Digital

    Bubba@4
    Not a contradiction, I just didn’t explain it well.
    Capital formation leads to consumer spending. Right now people have learned the valuable lesson of why savings are important. If you don’t have savings, you lose your house.
    So what you have now is people wanting to get savings back. I look around in my personal life (Nebraska) where the economy did not hit us as hard, but everyone is being conservative and trying to save. So we are all avoiding spending with the exception of buying new houses, that just made sense.
    So I am looking at a longer recovery, everyone wants things to be fixed right now. We need Joe Sixpack to learn his lesson, replenish or create his savings, then he will be in a better position to spend. If we encourage spending right now, we will diminish savings and be right where we are again when the economy dips. The quicker we get people to save, the quicker they will start spending again.
    Did that clear up the contradiction for you?

  • DonS

    This was a great idea two years ago when it was proposed by Republicans as an alternative to the stupid, politically motivated, inefficient “stimulus” pork barrel projects that were pursued instead, and didn’t work. But, it’s too late now. That money was spent and wasted, and we cannot afford to do something like this now unless we make commensurate reductions in spending as well. Merely moving the shells around, by paying for one tax reduction by increasing taxes elsewhere is obviously not stimulative. It’s political. And Joe is right, a temporary payroll tax reduction will not signficantly encourage hiring, because when employers hire they are assuming they are taking on the employment burden permanently, not merely for two years.

  • DonS

    This was a great idea two years ago when it was proposed by Republicans as an alternative to the stupid, politically motivated, inefficient “stimulus” pork barrel projects that were pursued instead, and didn’t work. But, it’s too late now. That money was spent and wasted, and we cannot afford to do something like this now unless we make commensurate reductions in spending as well. Merely moving the shells around, by paying for one tax reduction by increasing taxes elsewhere is obviously not stimulative. It’s political. And Joe is right, a temporary payroll tax reduction will not signficantly encourage hiring, because when employers hire they are assuming they are taking on the employment burden permanently, not merely for two years.

  • http://www.toddstadler.com/ tODD

    “This was a great idea two years ago when it was proposed by Republicans … But, it’s too late now” that liberals are proposing it (@6). I mean, two years ago, we could afford to spend lavishly! We had no economic woes! We also were just entering a recession. But spending was under control two years ago!

    [Sorry, my snark module is stuck in the "on" position of late.]

  • http://www.toddstadler.com/ tODD

    “This was a great idea two years ago when it was proposed by Republicans … But, it’s too late now” that liberals are proposing it (@6). I mean, two years ago, we could afford to spend lavishly! We had no economic woes! We also were just entering a recession. But spending was under control two years ago!

    [Sorry, my snark module is stuck in the "on" position of late.]

  • DonS

    tODD, at least quote the context of my statement: “That money was spent and wasted”. Two years ago, when it was inevitable that we were going to throw a trillion dollars at “stimulus” efforts, the simplest and fairest proposal to ensure that it was evenly and rapidly dissolved into the economy was to reduce payroll taxes. That hits corporate bottom lines, perhaps allowing them to retain more employees to weather the recession, and hits any working citizen as well, regardless of income, but disproportionately benefitting those of lower income, without the spectre of political cronyism and favoritism. It didn’t happen. Democrats didn’t want it, because they wanted cronyism and favoritism. They wanted to bless their constituencies disproportionately, and the evidence is that they did exactly that. But did they stimulate the economy equal to the usage of public funds? I guess that depends on who you ask.

    In any event, we already spent $1 trillion or so on that boondoggle. We don’t have another trillion to give, though now, all of a sudden, Democrats think that formerly Republican idea is a good one. And if we’re merely swapping one tax for another, that’s hardly stimulative. Moreover, if we’re exchanging a permanent tax increase for a temporary tax decrease, that’s bad policy.

    At this point, our priority needs to be getting our spending house in order. What are we going to do to bring spending, and, more importantly, future spending priorities, given our love for permanent and growing entitlements, into line with available revenues, without choking our economy down to rubble? Only then should we be further tinkering with taxes.

  • DonS

    tODD, at least quote the context of my statement: “That money was spent and wasted”. Two years ago, when it was inevitable that we were going to throw a trillion dollars at “stimulus” efforts, the simplest and fairest proposal to ensure that it was evenly and rapidly dissolved into the economy was to reduce payroll taxes. That hits corporate bottom lines, perhaps allowing them to retain more employees to weather the recession, and hits any working citizen as well, regardless of income, but disproportionately benefitting those of lower income, without the spectre of political cronyism and favoritism. It didn’t happen. Democrats didn’t want it, because they wanted cronyism and favoritism. They wanted to bless their constituencies disproportionately, and the evidence is that they did exactly that. But did they stimulate the economy equal to the usage of public funds? I guess that depends on who you ask.

    In any event, we already spent $1 trillion or so on that boondoggle. We don’t have another trillion to give, though now, all of a sudden, Democrats think that formerly Republican idea is a good one. And if we’re merely swapping one tax for another, that’s hardly stimulative. Moreover, if we’re exchanging a permanent tax increase for a temporary tax decrease, that’s bad policy.

    At this point, our priority needs to be getting our spending house in order. What are we going to do to bring spending, and, more importantly, future spending priorities, given our love for permanent and growing entitlements, into line with available revenues, without choking our economy down to rubble? Only then should we be further tinkering with taxes.

  • http://www.spaceagelutheran.blogspot.com/ SAL

    Spending was nearly 20% lower 2 years ago. Obviously we can’t afford much of anything new now.

  • http://www.spaceagelutheran.blogspot.com/ SAL

    Spending was nearly 20% lower 2 years ago. Obviously we can’t afford much of anything new now.

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    “Reality here is that prosperity follows productivity, and productivity follows capital formation.”

    Exactly.

    David Merkel has two posts on the topic:

    http://alephblog.com/2010/09/16/fairness-versus-economics/

    http://alephblog.com/2010/09/17/fairness-versus-economics-2/

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    “Reality here is that prosperity follows productivity, and productivity follows capital formation.”

    Exactly.

    David Merkel has two posts on the topic:

    http://alephblog.com/2010/09/16/fairness-versus-economics/

    http://alephblog.com/2010/09/17/fairness-versus-economics-2/

  • http://www.bikebubba.blogspot.com Bike Bubba

    Digital: yes, thanks.

    Regarding the proposal; when GAAP (honest, not government) accounting is used, Medicare and Social Security have been bankrupt for a while. So cutting taxes which support the programs without fundamentally changing how they work has always been a bad idea.

    Never mind, as Digital and I discussed, it tries to stimulate consumption at the expense of savings/capital formation. Exactly the wrong approach, even if SS and Medicare weren’t bankrupt.

  • http://www.bikebubba.blogspot.com Bike Bubba

    Digital: yes, thanks.

    Regarding the proposal; when GAAP (honest, not government) accounting is used, Medicare and Social Security have been bankrupt for a while. So cutting taxes which support the programs without fundamentally changing how they work has always been a bad idea.

    Never mind, as Digital and I discussed, it tries to stimulate consumption at the expense of savings/capital formation. Exactly the wrong approach, even if SS and Medicare weren’t bankrupt.

  • Cincinnatus

    I’ll take lower taxes for [ANY AMOUNT OF MONEY], Alex.

    A truism I inherited from my grandfather (approaching 100 years old), for better or worse, is that one should never, ever vote for higher taxes when one visits the polls. Not ever and not for anything. The unstated corollary, of course, is that one should also never vote for higher spending–which he didn’t, nor do I. Common sense flowed in greater abundance “back then,” apparently.

    When you factor in state, local, federal, property, sales, usage, capital gains, estate, Medicare, Social Security, vice, special purpose, and the infinite variety of other types of taxes we pay in the United States, the total tax burden on the average citizen is on par with the average burden in Europe (and yet we get so much less for it! We forget that our government was specifically designed to be inefficient). It is shocking to me that a proposal to lighten that burden just a tad is at all controversial during a time of fiscal hardship for many (most?) folks.

    N.B.: I give all due credit to the counsel of DonS et al. that the need for adjusting our spending levels probably supersedes the need for adjusting our revenue sources. But we know that neither is going to happen, so I prefer to dream.

  • Cincinnatus

    I’ll take lower taxes for [ANY AMOUNT OF MONEY], Alex.

    A truism I inherited from my grandfather (approaching 100 years old), for better or worse, is that one should never, ever vote for higher taxes when one visits the polls. Not ever and not for anything. The unstated corollary, of course, is that one should also never vote for higher spending–which he didn’t, nor do I. Common sense flowed in greater abundance “back then,” apparently.

    When you factor in state, local, federal, property, sales, usage, capital gains, estate, Medicare, Social Security, vice, special purpose, and the infinite variety of other types of taxes we pay in the United States, the total tax burden on the average citizen is on par with the average burden in Europe (and yet we get so much less for it! We forget that our government was specifically designed to be inefficient). It is shocking to me that a proposal to lighten that burden just a tad is at all controversial during a time of fiscal hardship for many (most?) folks.

    N.B.: I give all due credit to the counsel of DonS et al. that the need for adjusting our spending levels probably supersedes the need for adjusting our revenue sources. But we know that neither is going to happen, so I prefer to dream.

  • Louis

    Cincinnatus – I find your statement in #12 very interesting:

    “When you factor in state, local, federal, property, sales, usage, capital gains, estate, Medicare, Social Security, vice, special purpose, and the infinite variety of other types of taxes we pay in the United States, the total tax burden on the average citizen is on par with the average burden in Europe ”

    Can you refer me to any studies / reports? This would be an extremely interesting topic…

  • Louis

    Cincinnatus – I find your statement in #12 very interesting:

    “When you factor in state, local, federal, property, sales, usage, capital gains, estate, Medicare, Social Security, vice, special purpose, and the infinite variety of other types of taxes we pay in the United States, the total tax burden on the average citizen is on par with the average burden in Europe ”

    Can you refer me to any studies / reports? This would be an extremely interesting topic…

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    “Can you refer me to any studies / reports? This would be an extremely interesting topic…”

    google effective marginal tax rate and you will get a ton of stuff.

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    “Can you refer me to any studies / reports? This would be an extremely interesting topic…”

    google effective marginal tax rate and you will get a ton of stuff.

  • Cincinnatus

    Louis: A fair question you ask. Research via Google (a sophisticated data source and modeling tool) gives wildly varying estimates, primarily because the taxation system in the United States is extraordinarily complex: not only does it consist of multiple levels of government and revenue sources, but the tax codes for each are inordinately confusing.

    One think tank estimates that the total average tax burden on the American citizen constitutes 27% of his income. I find this to be unlikely because, for a single man with no dependents making $40,000, FICA alone would be 14% of his income, while Social Security would be 19%. That adds up to 33% of income, not even counting the infinite other taxes he must pay. It may be, though, that averaging in all the, ahem, “dependencies” in our population may bring the number to a more “modest” level (only 1/4 of my income! yay!). Meanwhile, other sources posit that the total effective rate is 60%, which seems more plausible. Since the average tax rate in Scandinavia is 50%, that would mean the USA is “winning.”

    In any case, I would do what sg suggests: Google. That would save us from bickering over the reliability or lack thereof of my sources. The sources are there, easy to find, and relatively clear. You’ll be able to see for yourself. Americans complain about their taxes for good reason.

  • Cincinnatus

    Louis: A fair question you ask. Research via Google (a sophisticated data source and modeling tool) gives wildly varying estimates, primarily because the taxation system in the United States is extraordinarily complex: not only does it consist of multiple levels of government and revenue sources, but the tax codes for each are inordinately confusing.

    One think tank estimates that the total average tax burden on the American citizen constitutes 27% of his income. I find this to be unlikely because, for a single man with no dependents making $40,000, FICA alone would be 14% of his income, while Social Security would be 19%. That adds up to 33% of income, not even counting the infinite other taxes he must pay. It may be, though, that averaging in all the, ahem, “dependencies” in our population may bring the number to a more “modest” level (only 1/4 of my income! yay!). Meanwhile, other sources posit that the total effective rate is 60%, which seems more plausible. Since the average tax rate in Scandinavia is 50%, that would mean the USA is “winning.”

    In any case, I would do what sg suggests: Google. That would save us from bickering over the reliability or lack thereof of my sources. The sources are there, easy to find, and relatively clear. You’ll be able to see for yourself. Americans complain about their taxes for good reason.

  • Cincinnatus

    Note: I would say the “real” number lies somewhere between 40% and 50%. That would mean the government is coercing 50% of our incomes from us. My own situation would lead me to believe that a high figure such as this one is accurate, though I am aware that anecdotal evidence counts for little.

  • Cincinnatus

    Note: I would say the “real” number lies somewhere between 40% and 50%. That would mean the government is coercing 50% of our incomes from us. My own situation would lead me to believe that a high figure such as this one is accurate, though I am aware that anecdotal evidence counts for little.

  • Gulliver

    I am sure that many remedies could be done to make things better. However, nothing much will be accomplished in the long run until the average citizen stops demanding something from the government. The “entitlement mentality” that many have (and that some people in government have fostered) means that politicians cannot (will not) scale back government help programs. Those programs certainly have helped the afflicted people of our nation, but we do not have enough resources to pay for a sizable portion of society to receive their living from government funds. Changing tax codes and work benefits may help turn the economy around, but not changing the dependance mentality will mean a continued draining of revenue resources.

  • Gulliver

    I am sure that many remedies could be done to make things better. However, nothing much will be accomplished in the long run until the average citizen stops demanding something from the government. The “entitlement mentality” that many have (and that some people in government have fostered) means that politicians cannot (will not) scale back government help programs. Those programs certainly have helped the afflicted people of our nation, but we do not have enough resources to pay for a sizable portion of society to receive their living from government funds. Changing tax codes and work benefits may help turn the economy around, but not changing the dependance mentality will mean a continued draining of revenue resources.

  • http://www.bikebubba.blogspot.com Bike Bubba

    Regarding overall taxation, when you combine property taxes, income taxes, sales taxes, tariffs and duties, corporate taxes, I believe that we’re at 40% or higher.

    BTW, FICA includes Socialist Insecurity, and it’s about 15.3% of income (no, your employer does not voluntarily contribute his share).

    Regarding the entitlement mentality, it can end if, and only if, people realize that the government cheese is hurting more than it is helping. Count on most politicians to obscure this fact, of course–especially on the Democratic side, but also on the GOP.

  • http://www.bikebubba.blogspot.com Bike Bubba

    Regarding overall taxation, when you combine property taxes, income taxes, sales taxes, tariffs and duties, corporate taxes, I believe that we’re at 40% or higher.

    BTW, FICA includes Socialist Insecurity, and it’s about 15.3% of income (no, your employer does not voluntarily contribute his share).

    Regarding the entitlement mentality, it can end if, and only if, people realize that the government cheese is hurting more than it is helping. Count on most politicians to obscure this fact, of course–especially on the Democratic side, but also on the GOP.

  • http://www.thirduse.com fws

    why not simply remove the ceiling or cap on earned income that is subject to fica and then reduce the overall percentage withheld for everyone? this would not reduce overall tax receipts and would arguably be more fair. and the effect is that the working poor would have more to spend. and they would do so immediately.

  • http://www.thirduse.com fws

    why not simply remove the ceiling or cap on earned income that is subject to fica and then reduce the overall percentage withheld for everyone? this would not reduce overall tax receipts and would arguably be more fair. and the effect is that the working poor would have more to spend. and they would do so immediately.

  • DonS

    Frank @ 19: Well, that’s a great plan if you make under $106,000 or whatever the FICA cap is. It’s pretty horrible if you make more than that, given that an extra 12.4% (less whatever your proposed reduction would be) would put your total federal tax rate on marginal income at 52%, which means in many blue states it would be about 62%. That’s confiscatory.

    The reason why there is a FICA cap is that benefits are also capped. So the extra amounts you would like to collect from “the wealthy” would not even give them any greater benefits when they retired. The benefits schedule is already tilted to advantage those of lower income as it is. Such a plan would completely unhinge Social Security from the idea of being a retirement insurance plan, converting it fully into a welfare plan. I can assure you that such a transition, which Democrats have historically resisted, would seriously damage its political support.

    It’s hard to see why you think that this change would somehow be “fair”, or why you think punishing productive people is good economic policy. It’s not. What we need to do, instead, is re-construct the program so that it is self-sustaining, by scheduling benefits to increase with inflation, rather than wages, and by delaying retirement ages to match current healthy lifespan increases.

  • DonS

    Frank @ 19: Well, that’s a great plan if you make under $106,000 or whatever the FICA cap is. It’s pretty horrible if you make more than that, given that an extra 12.4% (less whatever your proposed reduction would be) would put your total federal tax rate on marginal income at 52%, which means in many blue states it would be about 62%. That’s confiscatory.

    The reason why there is a FICA cap is that benefits are also capped. So the extra amounts you would like to collect from “the wealthy” would not even give them any greater benefits when they retired. The benefits schedule is already tilted to advantage those of lower income as it is. Such a plan would completely unhinge Social Security from the idea of being a retirement insurance plan, converting it fully into a welfare plan. I can assure you that such a transition, which Democrats have historically resisted, would seriously damage its political support.

    It’s hard to see why you think that this change would somehow be “fair”, or why you think punishing productive people is good economic policy. It’s not. What we need to do, instead, is re-construct the program so that it is self-sustaining, by scheduling benefits to increase with inflation, rather than wages, and by delaying retirement ages to match current healthy lifespan increases.