The Trillion Dollar Tax Increase

Jack A. Goldstone, George Mason University

How is this possible?   Republicans insisted, demanded, that the $42 billion per year in Bush-era tax-cuts for the rich be preserved and extended, even though that would cost over $420 million in the next ten years.  In other words, letting the tax-cuts for those making over $250,000 expire would provide fully one-third of the $1.2 trillion in deficit cuts that Congress is mandated to find by November. It is right there, sitting on the table, waiting to be taken – except that Republicans will apparently do anything to stop it.

But who is doing anything about the $1.1 trillion dollar tax increase that is scheduled to fall on ordinary American tax payers over the ten years starting in January 2012?

Most Americans don’t even realize that President Obama got them a tax cut of $112 billion in 2011 by reducing their payments of social security taxes from 6.2% to 4.2% of their income.  Republicans are fond of saying that the rich pay most of federal income taxes, and lower-income workers don’t pay them.  But they forget to mention that every worker pays (or did pay) social security and medicare taxes amounting to 15.3% of their income (half paid by their employers, half by themselves, but it all comes out of their employer’s salary costs – unless they are self-employed, in which case they pay the whole amount).

It may be true that the rich pay a majority of the US Federal Income taxes.  But those taxes, totaling $1.14 trillion in 2008, represent less than half the taxes the
Federal government collected that year (see the government official budget at http://www.gpoaccess.gov/usbudget/fy11/pdf/hist.pdf).  The other half — $900 billion – was paid in as social security and medicare taxes (the remaining $300 billion collected was corporate income taxes), and for those taxes the rich paid only a few percent of the total – almost all of it was paid for by ordinary Americans earning $250,000 per year or less.

Social security taxes work opposite to income taxes – the more you earn the less tax you pay.  An individual earning $50,000 per year pays a 12.4% tax rate on that income or about $6,000.   An individual earning ten times that amount, $500,000, pays a 2.6% tax rate, and someone who earns twenty times that amount, or $1,000,000 per year, pays a 1.3% tax rate. Oh, and on capital gains – the income from stock sales that mostly go to wealthier Americans — there is no social security tax at all.  That doesn’t seem fair, but that is the way it works.

Republicans are fond of advocating a flat tax – same rate for everyone on all income.  It would be WONDERFUL if they would apply that to social security taxes – a single flat rate on all income of all kinds the same for everyone – as that would go a long way to reducing our deficit to zero and saving social security for everyone. But they don’t seem to extend their belief in flat taxes to social security!

So for rich Americans, the important tax is the personal income tax – they pay most of it, and at higher rates.  The Bush tax cuts gave substantially lower income tax rates to high-income households, saving them $42 billion per year.  For ordinary Americans, the important tax is the social security tax – they pay most of it, and at higher rates than rich households.  The Obama tax cuts gave lower social security tax rates to ordinary Americans, saving them $112 billion per year.

Republicans insist that the lower rates for high-income households must be preserved, because not doing so would be an effective tax increase on those households.  But they also insist that the lower rates for average-income  households on social security taxes must be allowed to expire, even if that creates a trillion-dollar tax increase on ordinary Americans over the next decade!

Why are Republicans so intent on preserving tax cuts for the rich, but reversing tax cuts for ordinary American workers?  How have they fooled the American public into not seeing this?

Republicans argue that the high-income households are job-creators, and that taxing them will kill jobs.  In other words, they are really claiming that the reason the government should spend or borrow money to finance the tax cuts for high-income households is to stimulate the economy.  But wait – don’t the Republicans oppose Obama’s ‘stimulus’ spending?  Don’t they say stimulus spending doesn’t work and is wasteful?   I guess the Republican logic is that this is only true if stimulus comes from putting money back in the pockets of ordinary Americans – THEN it doesn’t work.  But they think putting money in the pockets of rich Americans is a stimulus that works.

Of course, the historical evidence and common sense show that there is no reason whatsoever to believe this!  Banks and corporations are sitting on trillions of money that they are not using to hire workers.  Why? Because when business have customers with more money, they will invest and hire people to serve those customers.  When businesses do not have or expect more customers, they will not invest and hire no matter how much money is in the pockets of business owners.  So stimulus works to create jobs when it creates customers.

Even if the rich spent every single dollar of their tax cuts on hiring workers and paying wages, and didn’t spend a single penny on their own savings or spending (however unlikely that may be), the current tax cuts for the rich would only put $42 billion per year in the pockets of ordinary workers, less than half as much as the social security tax cut from President Obama provided.  Remember that Obama’s tax cut is not welfare spending– it is simply letting people who do work keep more of their own earnings.  It lets ordinary people be better customers.  That is what business needs.

So here is where the tax deal reached last week left us – rich Americans get to keep a ‘stimulus’ package worth $420 billion over ten years, because Republicans do not want those tax cuts to expire.  At the same time, ordinary working Americans will have to pay a trillion dollars in higher taxes over the next ten years, because Republicans insist that the tax cuts given to ordinary workers by President Obama must be allowed to expire.

Why is no one pointing this out to the American people?

Here is what we should be discussing – what would be fair and revenue-neutral (no new income going to government, no new net spending)?:  (1) Let only one-half the Obama tax cut on social security expire.  (2) Treat the new lower social security tax rate – 12.2% instead of 13.3% — as a flat tax on ALL income.  (3) Let the Bush-era taxes on rich households expire. (2) and (3) will almost exactly offset (1).

So let’s be honest. The above plan lets some tax-cuts for everyone expire, but keeps $500 billion over 10 years going to American private sector workers (and customers), while being revenue neutral and not giving the government any more money to spend.

The Republican Plan embodied in this week’s debt-ceiling agreement increases taxes on ordinary workers by one trillion dollars over ten years, and over the same period increases money going to the government by $600 billion dollars, while keeping only $400 billion going to the private sector (all to the rich).  Let’s let ordinary Americans know the truth and let them choose – which plan do you think they will want?

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About jackgoldstone

Hazel Professor of Public Policy at George Mason University
This entry was posted in U.S. Politics. Bookmark the permalink.

One Response to The Trillion Dollar Tax Increase

  1. Liz Leahy Madsen says:

    Jack, this is an important issue to flag and one I hadn’t recognized before reading your post. Seems like it would be a good topic for a column by Ezra Klein at the Post or others who probe the political implications of economic policy.

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