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The Tax That Tolls for Thee—Viewpoints | EPI

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The Tax That Tolls for Thee

by Max Sawicky

Used to be that April 15th was just the day income taxes were due. Now “Tax Day” has become a festival of the disgruntled — an occasion for resentment of our foregone blessings. This bile is stirred by the feeling that the Federal income tax takes the most onerous bite out of everyone’s hard-earned income. Not so.

Consider the usual litany of Tax Day grievances, such as capital gains. About 22 million tax returns report taxable capital gains, but most of these taxpayers enjoy special, reduced tax rates. Meanwhile, there are over 120 million income tax returns. Gripes also attend the Alternative Minimum Tax and the Estate and Gift Tax, which apply to fewer than half a million taxpayers.

By and large, all of these taxes affect people in the top five percent of the population. The poorest of these families have six-figure incomes. If this is misery, I’d love its company.

Why not concentrate tax relief on the many, rather than the few? We are a nation of 150 million workers. Everyone knows that labor income doesn’t get the breaks afforded capital gains and such. Let’s start with the payroll tax.

For 80 percent of the population, if you go by income group, payroll taxes exceed income taxes. Furthermore, we now pay almost $130 billion more in payroll taxes than are needed to pay Social Security benefits. The ability to pay taxes depends on income, not just wages, so the imbalance between payroll and income taxes should be reversed. The payroll tax should be replaced or reduced.

One way to replace the payroll tax is to allow it as a refundable credit against income tax liability. For every thousand dollars of wages, your $76.50 in payroll taxes would reduce your income taxes. If you pay more payroll tax than income tax, the government sends you a check. The Social Security Trust Fund is still credited for all payroll taxes paid. To recover the revenue, we raise income tax rates and broaden the income tax base, both for persons and corporations. Even so, workers get a break. So could small business, because of lower labor costs. Employment could be boosted for those earning the lowest pay.

If all payroll tax revenue is replaced, there’s still that surplus. I’d expand public investment in infrastructure, education, and scientific research, all sorely neglected for years and more beneficial to working people than paying down the national debt.

If Congress is unwilling to ramp up public investment, I’d just as soon have a payroll tax cut and dispose of my own infernal debts. A rate cut of 1.5% would provide an extra $15 in take-home pay for every thousand we earn, for as much as $68,400 in wages.

Later it may be necessary to increase payroll and income taxes. Retirees will be living longer and drawing more Social Security benefits. But tax hikes will be neither difficult nor unfair. Wages could easily outstrip whatever tax hikes are necessary to finance Social Security. So cut the tax now and raise it later if need be. Much simpler than the Clinton Administration’s mind-numbing manipulation of the Trust Fund, or the Republicans’ snake-oil privatization schemes.

If Congress would look to the millions of working people, rather than to the downtrodden rich, Tax Day might be worth celebrating.


Max Sawicky is an economist with EPI. He specializes in U.S. budget policy and tax issues.

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