Find right balance on taxes

December 24, 2007|By William Drayton

In 1988, George H. W. Bush uttered his iconic sound bite, "Read my lips: no new taxes." He ate those words two years later, then endured the backlash in 1992. That should have been a clue that "no new taxes" was too simplistic to fit the actual state of our fiscal needs.

Twenty years later, the sound bite is harder on the ear. The first crop of baby boomers (those born in 1946) are about to qualify for early Social Security benefits starting Jan. 1. Projected Social Security and Medicare shortfalls, soaring spending, huge deficits and recession worries all suggest revenues will contract and budgets will tighten to the point where further tax cuts would make matters worse. But slow or negative growth would require a stimulus package, and tax increases have the opposite effect.

What we need now is a more nuanced debate on tax policy, especially regarding Social Security funding, rather than a shout-out that tries to tar one's opponent with the "new taxes" tag. And here's why:

Federal payroll taxes are notoriously regressive. They are the biggest tax that 80 percent of Americans pay, generating about as much revenue as the federal income tax, yet the rich pay very little of it - income above $102,000 is exempt. Democratic presidential candidates Barack Obama, John Edwards and Christopher J. Dodd favor raising the caps on the Social Security payroll tax, probably with a "doughnut hole" exempting higher middle-class incomes above $102,000 but kicking in again somewhere above $200,000.

Some call this a "new" tax or a tax "increase," but if so, it applies only to the wealthy. Senator Obama also proposes a tax credit to decrease the payroll tax burden on lower-income families. So, incidentally, does Warren E. Buffett. In recent testimony, he told the Senate Finance Committee that his own taxes were too low, and reminded the members that there are 23 million American households earning $20,000 or less, who pay up to 15.3 percent of it in payroll taxes and need relief.

But beyond tax equity, the big reason to reduce the payroll tax burden, particularly for low-income workers, is to create jobs. Payroll taxes artificially increase the cost of hiring and depress job growth, yet payroll tax revenues and rates have grown continually and today represent around 40 percent of federal revenue.

Democrats Hillary Rodham Clinton and Bill Richardson and Republicans Rudolph W. Giuliani, Mitt Romney and Fred Thompson oppose raising payroll tax caps. Not raising them avoids further depressing job growth, but job growth needs stimulating.

The Bureau of Labor Statistics says that with 4.7 percent unemployment, some 7.2 million Americans aren't working.

But the number of chronically unemployed and underemployed groups who want a job - discouraged workers, women, minorities, seniors, people with disabilities, legal immigrants - is at least 70 million.

Imagine the impact of a two-thirds cut in payroll taxes, which would boost employment 10 percent in the long term - and create millions more jobs.

France, Germany and many other countries are cutting payroll taxes to boost employment; we can, too.

Republican candidate Ron Paul, for example, would reduce Social Security payroll taxes seniors pay. Mike Huckabee would eliminate payroll taxes as the funding mechanism for Social Security altogether, in favor of private savings accounts and a new sales tax.

Such new tax talk is apparently no longer the anathema it was in 1988. The list of those proposing some form of new taxes on consumption, pollution or energy, offset by payroll tax cuts, includes the AFL-CIO, the Business Roundtable, Al Gore, T. Boone Pickens, Bill Bradley and columnists ranging from Charles Krauthammer to Thomas L. Friedman. In uncertain economic times, the "no new taxes" sound bite may have to yield to a more nuanced message from candidates' lips: cut truly destructive taxes, but balance them with new and better sources of revenue.

William Drayton chairs the board of Get America Working, a nonpartisan, nonprofit employment policy group.

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