Support for cutting payroll tax broadens

WASHINGTON – A lot of politicians are starting to worry about the little guy when it comes to cutting taxes.

A fresh round of tax cuts to stimulate the economy is expected to be one of the first tasks when the 108th Congress convenes in January.

A growing number of voices on both the right and the left are insisting that the package include a reduction in payroll taxes, such as those taken out of every paycheck to finance Social Security and Medicare.

Most American workers pay more in payroll taxes than they do in income taxes.

And that’s especially true for low-income workers.

In fact, about 30 percent of the work force pays payroll taxes but ends up owing no income taxes, Congress’ Joint Committee on Taxation reported. Because they pay little or no income tax, these same workers were left out of the $ 1.3 trillion tax cut package passed last year.

That’s why advocates contend a payroll-tax reduction would be the most effective measure Congress could pass to stimulate the economy: The middle- and lower-income workers who would benefit the most would be the most likely to put their money back into the economy through spending.

“It’s as good a way as any to put money in the hands of those most affected by the downturn in the economy” said William Dickens, an economic analyst at the Brookings Institution, a Washington think tank.

Democratic presidential candidate John Kerry, a senator from Massachusetts, thinks so too.

“Unlike most so-called stimulus plans, a payroll tax [reduction ] would help every working American,” Kerry said in an opinion-editorial piece published recently in the Boston Globe.

Every worker pays 6.2 percent in Social Security taxes and 1.45 percent in Medicare taxes on wages up to $ 84,900. Employers make matching tax payments. Together, the taxes equal 15.3 percent of wages and bring in almost $ 700 billion a year.

Kerry is calling for a oneyear suspension of payroll taxes on the first $ 10,000 in income. Such a payroll tax “holiday” would give each worker an extra $ 765.

Sen. Bob Graham of Florida, another possible Democratic presidential candidate, has seconded the idea. And another Democrat, Sen. Mary Landrieu of Louisiana, survived a tough re-election challenge this year by calling for payroll tax cuts as well.

Conservatives also have gotten into the act. Conservative editor William Kristol recently told the National Journal, a public policy magazine, that a cut in payroll taxes is politically necessary for the Bush administration to pass any larger program of tax cuts that focuses on issues such as income tax brackets and stock dividends. Otherwise, the administration will face new charges that it caters only to the rich.

Former Republican Rep. Jack Kemp told the National Journal that cutting payroll taxes needs to be done because, “It’s not for Wall Street; it’s for Main Street.”

The Club for Growth, a Washington-based conservative group that advocates aggressive tax-cutting, wants more than a one-year reduction. The group is calling for a 1 percent reduction in the combined Social Security and Medicare payroll tax rate lasting at least five years or until unemployment falls below 4 percent.

Such a move would put an estimated $ 35 billion a year into workers’ pockets. But employers also would benefit and have incentive to hire more workers.

“That’s a pretty hefty kick in the pants for the economy,” economist Stephen Moore, head of the group, said.

In contrast, a one-time payroll tax cut would not encourage employers to hire more, say critics of Kerry’s plan.

With so many endorsing a cut in payroll taxes, the Bush administration is rethinking its previous opposition to the idea.

“The politics of this look to be playing out,” said Eric Engen, tax expert at the American Enterprise Institute, a Washingtonbased think tank.

But cutting payroll taxes raises a host of issues related to the always politically sensitive Social Security and Medicare programs, not the least of which is cost.

Kerry’s plan, which would be a type of tax rebate for workers, would involve a onetime cost of an estimated $ 100 billion to $ 129 billion. The Massachusetts senator says the money can come from slowing down income tax cuts slated to take effect later this decade. That way, neither Social Security or Medicare would be harmed, he added.

But others question where that money would come from without hurting other programs.

“I’m rather bemused by the debate,” said Robert McIntyre, head of Citizens for Tax Justice, a liberal research and advocacy group in Washington.

And Kerry’s idea of using general revenues to compensate for a reduction in Social Security and Medicare taxes threatens to cross a line that many are wary of, added Engen, the American Enterprise Institute analyst.

For years, he said, Social Security experts have preached the necessity of not mingling entitlement financing and general revenues. If Social Security is seen as supported by general revenues, rather than through payroll taxes, he said, it could lose some of its political support.

“Social Security would be viewed as welfare,” Engen said.

Sen. Blanche Lincoln of Arkansas, a Democrat and member of the Senate Finance Committee, said she would want to carefully examine proposals for altering Social Security and Medicare programs.

“We don’t want to jeopardize what the elderly are depending on,” she said, adding that Social Security and Medicare financing is “intricately designed.”

But Lincoln said she definitely wants to look at options that would help lower-income Americans. “We have to really think it out,” she said.

Others say it won’t hurt to cut payroll taxes because the longterm financing of both programs will have to be reworked anyway. If they aren’t, Social Security and Medicare will “eat the whole [federal] budget” by 2050, Engen said.

Similarly, Citizens for a Sound Economy, another Washington-based conservative group that advocates tax cuts, said it is foolish to let long-term concerns about Social Security and Medicare financing stand in the way of small payroll tax reductions.

“A payroll tax cut may exacerbate Social Security’s current $ 3.2 trillion unfunded liability, but the entire system is in such dire financial straits that a payroll tax cut at this stage would be akin to cutting half an hour off the Titanic’s voyage,” Jason Thomas, staff economist, said in a paper prepared by the group.

This story was originally published on Sunday, December 29, 2002.

LOAD-DATE: December 30, 2002