Ross Douthat comes out on the side of the angels in proposing the abolition of the Federal Insurance Contributions Act tax, the “payroll tax”:
The payroll tax holiday that passed Congress in the winter of 2010 was a rare exception to this pessimistic rule. Cutting the payroll tax was good short-term politics for both Democrats and Republicans: it was a tax cut that liberals hoped would double as stimulus, and a boost to the middle class that conservatives could support without embracing new federal spending. But more important, it opened the door to what would be good long-term policy as well — because more than almost any feature of the American tax code, the payroll tax deserves to be pared away into extinction.
But now Washington is in danger of practicing payroll-tax bipartisanship of a more destructive sort. While the White House and Congressional Republicans wrestle over where to set income tax rates and how and whether to cut spending, the payroll tax holiday has been orphaned. Lacking noisy champions and press attention, it’s in danger of expiring at the end of the year out of political indifference.
That outcome would be unfortunate. Payroll taxes are a relic of New Deal Machiavellianism: by taking a bite of every worker’s paycheck and promising postretirement returns, Franklin Roosevelt effectively disguised Social Security as a pay-as-you-go system, even though the program actually redistributes from rich to poor and young to old. That disguise has helped keep Social Security sacrosanct — hailed by Democrats because it protects the poor and backed by Republicans as a reward for steady work.
A general rule of thumb, based on straightforward principles of supply and demand, is that, if you tax something, people will produce less of it. The payroll tax is a tax on jobs and income, particularly on jobs and income where the wage is less than the FICA maximum limit, presently $100,100. Do we really want fewer jobs and less income? FICA falls particularly hard on workers at the lower end of the payscale. Because of its maximum limit it is a regressive tax.
The Social Security retirement payment plan is not now a “pay as you go” system. For the last several years revenues have fallen below mandated disbursements. The difference is made up out of the general fund (essentially, 40% of that is borrowed). One of the ironies of the frequent longing citation of progressives over the Swedish welfare system is that Sweden’s social insurance system is a pay as you go system. Disbursements are limited to revenues, something I strongly suspect would dismay its American fans if it were implemented here. If it were implemented here, the Social Security system would become permanently solvent with the swipe of a pen.
When you combine the FICA tax liability with costs incurred as a result of working and decreasing eligibility for various benefits with increasing income, a significant number of people are actually discouraged from working. This is a perverse result and we should eliminate it.
Eliminating FICA is a good first step in that direction. It would have the additional beneficial effect of reducing the bookkeeping requirement for businesses and individuals. Have you noticed how many nominees to appointive office fall afoul of paying taxes on behalf of their domestic employees? That’s not because they’re cheap or, at least, not just because they’re cheap. It’s because it’s arduous.