This Is No Middle Class Tax Cut

by Alan Reynolds


This article appeared in New York Daily News on December 12, 2011.

To hear President Obama tell it, Republicans in Congress “actually said ‘no’ to cutting taxes for middle class families.” The deal he struck a year ago was to keep the Bush tax cuts through 2012 in exchange for a one-year reduction in employee payroll taxes — the levies that fund Social Security and Medicare — to 4.2% from 6.2%. The year is up and the President hopes to renege on the deal. He now wants to cut the payroll tax in half — to 3.1% — and Congress is expected to vote on it this week, perhaps as soon as Tuesday.

Seniors take note: Does this sound like a plan to shore up Social Security? True, the President says this would be for just one more year, but that’s what he said last year. Can you imagine Obama running for President by promising to put payroll taxes back up to 6.2%? If congressional Republicans step into this trap now, they will surely be chastised again next November if they dare to question yet another extension of what began as a one-year tax break.

Calling this perennial payroll tax holiday a ‘middle class tax cut’ is an outright hoax.

If the President and congressional Democrats have their way, this temporary tax cut would be paid for by permanent taxes on high incomes. By defining failure to raise tax rates on the rich as equivalent to cutting their taxes, Republicans are easily depicted as denying tax cuts for the middle class to protect tax cuts for the rich. This is doubly deceptive. The fact is that much higher tax rates on higher incomes have already been enacted for 2013-2014.

But there’s a bigger point that’s far too often ignored: Calling this perennial payroll tax holiday a “middle class tax cut” is an outright hoax.

Former Census Bureau economists at Sentier Research, John Coder and Gordon Green, estimate that more than half of this year’s payroll tax cuts went to the most affluent 20%, while only 15% went to those with incomes below the median. Among the 77% of U.S. households who pay any payroll taxes, they find the top 10% got 31.3% of this so-called “middle class” tax cut while the middle 10% got 6.1%.

Alan Reynolds a senior fellow with the Cato Institute, is the author of Income and Wealth(Greenwood Press 2006).

More by Alan Reynolds

The reason the bulk of payroll taxes are paid by the top 10-20% is not just because they earn more, but because they have more full-time workers per family. For 2010, the Census Bureau counts 48.3 million workers in the top fifth, 31.6 million in the middle and 10.2 million at the bottom.

And, unlike families with higher incomes from two full-time salaries, those with lower incomes are often retired or work part-time. There were about eight times as many full-time workers in the top 20% (16.6 million) as there were in the bottom 20% (2.2 million).

The point is, the President’s incessant complaint that Republicans have blocked higher income tax rates for “the rich” — which he suggests is a major reason for our terrible fiscal situation — is a monumental fabrication. All of the Bush tax cuts are scheduled to expire at the end of next year, which will raise the top tax rate to 39.6% from 35% while also phasing-out deductions and personal exemptions at higher incomes.

On top of that, the Federal Health Care Act will add a 3.8% surtax on investment income, pushing the top tax rate to 23.8% on capital gains and 43.4% on dividends — up from 15% today. And on top of that, the congressional Democrats are now proposing an extra surtax on incomes above $1 million — ostensibly to “pay for” this one-year reduction of payroll taxes that primarily benefits the top 20%.

Add it all up, and it’s a ridiculous and counterproductive shell game.

This is not the first time the President has tried to change the rules of the game. He also bushwhacked the supercommittee by giving a televised speech to a joint session of Congress proposing to add $447 billion to the deficit to fund what he called vital job creation measures, even as the committee was struggling to reduce future deficits by a mere $120 billion a year.

To put such $120 billion deficit-reduction goals in perspective, Sentier Research estimates that the President’s plan to cut the Social Security tax rate in half would add $187 billion to next year’s deficit. Yet Obama calls this “stepping on the gas” of the economy, as though adding more and more to the national debt is a gift to the jobless. If so, it’s Greek to me.

Borrowing from Peter to lend Paul a temporary tax cut doesn’t “put more money in people’s pockets.” It puts more IOUs in their pockets. That is, it puts Paul even deeper in debt to Peter, and therefore obligated to pay more taxes in the future to repay that loan with interest.

The best way to pay for another temporary cut in the payroll tax is to not pass it.