Payroll Tax Showdown

After the debt ceiling debacle and the failure of the administration’s super committee, you’d think leaders in Washington would take the opportunity to show the nation, and the world, that yes, despite our differences we can agree on something. The latest battle on Capitol Hill is over the payroll tax.

Employers are required to withhold tax money from employees’ paychecks and must also contribute tax money for employing a worker. Payroll software can automatically calculate tax rates and track employee time and attendance, but the Washington tax battle goes far beyond just dollars and sense. For workers, there’s no way to measure the grief of losing your job – or your thankfulness that you still have a job in a tight financial climate. Gridlock in Washington has hurt the American worker and now it’s time for legislators to finally take action.

Photo Courtesy of DonkeyHotey

The payroll tax controversy stems from how the tax is paid. Democrats are pushing for a Robin Hood tax that would apply to people making over $1 million. That money would then manifest as a tax check for the middle class, who could definitely use it right about now. Republicans disagree with raising taxes on any Americans in this murky economy – even the millionaires.

Finger pointing has run rampant and unchecked. Democrats are sneering at the Republicans’ refusal to pass a measure they once supported. Republicans curl their lips at the prospect of a “rich tax”, calling it a penalty for being financially successful and a blow to “job creators”. What do the experts say?

David Windish makes a case against the tax holiday:

If Congress decides to simply let the Bush tax cuts expire at the end of next year, they are in reality making a huge change in our tax structure. It would mean going back to what we had 12 years ago – does anyone even remember or can anyone list all the tax provisions that will sunset as those tax cuts expire? The outcry to block that change and extend the current tax structure will surely be heard in a Congress facing re-election battles. Cherry picking provisions in the tax code and singling them out for reform will face a similar outcry from those who fear they will pay more. Be honest, we’ll all be chanting the little rhyme: “Don’t tax you, don’t tax me, tax that fellow behind the tree.” Unfortunately, the reality is that fellow’s pockets are empty.

Perhaps the problem lies in the belief that these tax cuts will “stimulate the economy”. It sure sounds nice on paper and in speeches but what sort of stimulus did the Bush tax cuts create? William Gale wrote an op-ed in the New York Times late last year addressing just that:

After the tax rebates in 2001, 2003, and 2008, households appear to have spent in relatively short order somewhere between 25 and 67 cents more for each dollar of tax cut. This makes tax cuts in general – even the parts of those tax bills that were intended to stimulate – a relatively weak way to help the economy compared to increases in government purchases, for which each dollar of increased deficit turns into an additional dollar of spending.

Also, high-income households are less likely than low-income households to spend much of their rebate. The Bush tax cuts in general – and tax cuts that only benefit high-income households in particular – favor the wealthy, and so are a particularly poor way to stimulate a weak economy.

The largest failing of the cuts as stimulus is that they benefit the wealthy. There is no stimulus because people who have money now have more money. The so-called job creators aren’t creating so much as a macaroni painting with the money. Meanwhile, the quickly eroding middle class is grasping frantically for a lifesaver in the suffocating waves of the economy and Republicans are holding tight to their Gucci life vests saying, “Would that you had a job and could afford this!”

Revenue provisions need to be raised some way or another. Right now, this is the plan, and it may not be the best plan, but the alternative is doing nothing and that hasn’t gone well for us so far.


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