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