Government

A Reflection On Taxes

Hopefully the country does not collapse in on itself from its own weight like a black hole so we can all see my inevitable follow-up piece, Taxes II: A New Bracket. And This Time, It’s Personal.

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Shortly before Congress passed the 2017 Tax Cuts and Jobs Act, Florida Senator Marco Rubio (R) made a last-minute demand. Senator Rubio threatened to vote no unless his proposal to expand the refundable child tax credit was included. Moreover, in order to help “the people we should actually be helping,” Senator Rubio proposed making the refundable credit increase applicable against payroll taxes.

For those who may not be aware, payroll taxes are the taxes working Americans pay out of every paycheck and are used to fund Medicare and Social Security benefits. The burden these payroll taxes impose is substantial. When the latest tax reform bill was passed, The Tax Policy Center estimated a majority of households paid more in payroll taxes than in income taxes.

 

So, by making the refundable child credit increase applicable against payroll taxes, Senator Rubio’s proposal ensured that working Americans who may not earn enough income tax credit could still take advantage of the refundable increase.

 

Senator Rubio’s initial proposal could have been characterized as simply the reflection of the most recent Republican Party platform, which expressed the desire to lower tax burdens not just from “the top down.” Accordingly, one could also have expected Senator Rubio’s modest proposal to lessen the burden on working households with children to have been accepted into the final tax bill without objection. Except that it wasn’t. In fact, the GOP controlled Congress greeted Senator Rubio’s demand with great skepticism, and in the end, Senator Rubio’s proposed refundable credit increase was significantly lessened.

For years now, the Congressional GOP has rejected payroll tax cuts. Instead, the party, as they did during the passage of the 2017 Tax Cuts and Jobs Act, has stressed permanently lowering corporate taxes. Some have argued that cutting corporate rates is preferable to payroll tax cuts because payroll revenue is directed towards Social Security retirement and Medicare benefits. However, as James Capretta at the American Enterprise Institute illustrates, this argument against payroll cuts has serious flaws:

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[T]he benefits owed to a worker under Social Security are based on the worker’s earnings each quarter, not the amount of taxes paid on those wages. Consequently, a cut in the payroll-tax rate would in no way lessen future Social Security benefits. Further, the opaqueness and complexity of the formula for Social Security benefits makes it nearly impossible for most workers to make a sensible connection between what they earn and what they will get in retirement. (There often is very little connection.) Medicare benefits are in no way tied to the amount of taxes paid or even to overall earnings. Instead, workers must meet a minimum threshold of wages over a ten-year period to become eligible for coverage at age 65.

If anything, a cut in the payroll-tax rate is likely to increase benefits owed under Social Security by encouraging an increase in the supply of labor, which increases earnings and hence the amount owed to workers under Social Security’s benefit formula.

Given the impact payroll taxes have on the supply of labor and consumer purchasing power, it appears strange that cuts are not being demanded for more. For their part, newly elected Democrats have touted progressive tax rates formulas that have recently gained popularity. What inevitably gets interjected into most discussions regarding taxes however is the sheer amount of the burden the country regularly takes upon.

We are in an age of regularly occurring trillion-dollar deficits with no end in sight. The last budget proposed by this Republican president included spending increases of over $7 trillion in the next decade. The most recent tax “cuts” made in 2017 not only did not “pay for themselves” as repeatedly promised, but greatly added to the deficit. And lest we not forget, the current government shutdown is over the president’s demand to spend billions and billions more, this time on a border wall evidence suggests won’t even work.

There are still those who regularly try to remind us all that deficits still matter, and I suppose like many Americans, I could provide some helpful suggestions for drastically reducing government spending and increasing revenue. But at whatever level of tax burden Congress agrees to impose on working Americans, there is a strong argument those paying the payroll tax should carry the least of it.

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Tyler Broker is the Free Expression and Privacy Fellow at the University of Arizona James E. Rogers College of Law. His work has been published in the Gonzaga Law Review and the Albany Law Review. Feel free to email him or follow him on Twitter to discuss his column.

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