A Tax Cut for Working People or a Tax Cut for the Super Rich?

Reich Report Newsletter, Dec. 23, 2002

Here's a holiday proposal. Exempt the first $20,000 of your income from payroll taxes. The payroll-tax holiday will last two years. That means about $5,000 extra money to your family, if you're a typical two-earner household. Ballpark cost to the federal government over the two years, $700 billion. How to pay for it? Repeal the Bush Administration's estate tax cut and stop the White House from making it permanent.

Bush has a different plan, of course. His goal is to make his whopping $1.35 trillion tax cut permanent, including the estate-tax cut. Republicans love forcing Democrats to vote for or against tax cuts. It puts Democrats into a Republican box. Bush did it last year and it worked.

Having lost control over both houses of Congress, Democrats should have learned their lesson. Avoid the Republican box. Instead, force Republicans into a Democratic box. Make them choose betwee a payroll tax cut for over 130 million American working families or a tax cut for the richest 2 percent of American families, worth millions to each of their do-nothing kids. If Republicans are too dumb to choose a payroll tax cut over an estate-tax cut, Democrats should blast them.

Everyone hates taxes but the payroll tax is about the worst. Four out of five American workers pay more in payroll taxes than they do in income taxes. The payroll tax is also regressive; poorer workers pay proportionately more than richer. It's paid out of the very first dollar earned, all the way up to a threshold that's now roughly $80,000. After that, nothing. Wealthy earners pay only the tiny Medicare portion of the payroll tax on all their earnings So the very rich finish paying early in the year. Bill Gates is done a few minutes past midnight, January 1. True, poorer retirees get back more each year from Social Security and Medicare relative to the taxes they contributed when they worked. But poorer retirees don't live nearly as long, so overall, the system's still regressive.

At the end of World War II, only 2 percent of federal revenue came from payroll taxes; now it's 37 percent. That's because most major tax cuts of past 25 years have been heavily tilted toward the rich. The biggest tax increase has been the payroll tax, which rose substantially in the 1980s.

The estate tax is almost a mirror image of the payroll tax. Ninety-eight percent of American families don't come near it because it now affects only people who die with a net worth of more than $1 million. Half of all estate taxes collected by the federal government in 1999 came from 3,300 family estates. A quarter of all estate taxes came from just 467 families, each of whom was worth more than $20 million. We're talking about the super, super rich.

Besides, a payroll-tax cut will be a boon to the economy, stimulating more spending just when we need it. If you hadn't noticed, the economy is almost comatose. The Federal Reserve Board can't kick-start it even after twelve rate cuts. The reason is we still have a lot of productive capacity that's not being used, because there aren't enough customers for all the goods and services that can be produced. Bottom line: Businesses won't invest a penny more in new equipment or new jobs until consumers buy more.

The best way to get consumers to buy more is to put more money in their pockets. And the easiest way to do this by cutting payroll taxes. And there's this bonus: Since employers would no longer have to pay their share, they'd have an extra incentive to keep more people on their payrolls.

The Bush estate-tax cut, on the other hand, has virtually no stimulative effect on the economy. It gives more money to a handful of rich families that already spend as much as they want.

Anyone worried that a payroll tax cut will hurt Social Security or Medicare doesn't understand federal budgeting. Every tax dollar the government collects is the same as every other dollar. Repeal the estate-tax cut and prevent the Bush Administration from making the cut permanent, and the federal government gains $700 billion, making up for the $700 it loses by cutting the payroll tax for two years.

Framing it as a choice between the two cuts also serves a larger purpose. It draws public attention to the scandal of the widening gap of income and wealth in America over the past two decades. After-tax incomes of the top 1 percent of American families have risen more than 150 percent, while the vast majority of families in middle have barely gained ground. America hasn't experienced this degree of inequality in over eighty years.

Part of the widening gap is due to a shift in economy away from standardized production and good unionized jobs, towards constant innovations requiring more specialized knowledge. But it's also the consequence of government policies that have favored the rich and powerful, while doing little or nothing to help everyone else through the transition. The Bush estate-tax cut is Exhibit A.

So there you have it, a clear choice that speaks volumes. Democrats had no message in 2002 and paid the price. Bush had a tax cut and a war on terrorism. You can't fight something with nothing. If Democrats want to win back at least one chamber of Congress and have a fair chance of regaining the White House two years from now, they'll have to fashion a tough but humane foreign policy, and a plan to get the economy moving. Most importantly, they'll need to remind Americans about what's at stake -- a democratic society that offers the world a model of equity and opportunity.

-- Robert Reich