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President Obama’s unspoken payroll tax increases

at 06:00 AM ET, 07/26/2012


(Susan Walsh/AP)

“Congress faces a choice.  On January 1, taxes are scheduled to go up for 114 million middle class families by an average of $1,600 as such tax cuts as the expanded Child Tax Credit, the 10 percent tax bracket, marriage penalty relief, and the American Opportunity Tax Credit all expire.  A typical middle class family of four would see its taxes rise by $2,200.”

White House report on President Obama’s proposal to extend middle-class tax cuts, released July 24, 2012

 “We’ve got to do it in a balanced way by making sure that those of us who’ve been blessed by this country are giving back a little bit more and going back to the Clinton tax rates.”

— President Obama, remarks at a campaign event, July 23

“I’m also going to ask anybody making over $250,000 a year to go back to the tax rates they were paying under Bill Clinton.”

— Obama, remarks at a campaign event, July 24

Usually, during discussions about who pays taxes in the United States, conservatives tend to ignore payroll taxes (such as for Social Security and Medicare) and focus on federal income taxes. A good example of that is an opinion article in the Wall Street Journal this week by former Bush spokesman Ari Fleischer.

If you only count income taxes, then you can argue that some 50 percent of Americans pay no taxes. Or, you can argue, as Fleischer does, that the top 20 percent of income earners  “make 50 percent of the nation's income but pay nearly 70 percent of all federal taxes.”

 But virtually all workers pay payroll taxes. When payroll taxes are included, as well as state and local taxes, the picture changes significantly. The tax burden is suddenly more evenly distributed.

 But, interestingly, when talking about taxes these days, the White House is relatively silent about coming increases in payroll taxes — both for the rich and poor. Let’s take a look.

 

The Facts

 The White House report released this week — ahead of the vote in the Senate Wednesday to extend tax cuts for household income below $250,000 — does mention two years of payroll tax cuts that Obama pushed through in 2011 and 2012, but only when talking about how much money the president has saved American families:

A typical family making $50,000 a year has seen their taxes cut by $3,600 over the last four years, $800 in each of 2009 and 2010 due to the Making Work Pay tax credit and $1,000 in each of 2011 and 2012 due to the payroll tax cut.

The payroll tax provisions resulted in a 2 percentage point reduction in payroll taxes, or as much as $2,200 for 160 million workers. (The Social Security tax — usually 6.2 percent — stops getting collected on income over $110,100.)

 But Obama has not proposed extending the payroll tax cut — the White House spokesman has danced around the issue, saying it is “something that we would look at in December”— and there is little appetite on Capitol Hill for extending it either. (Republicans have never liked the concept.)

 For that typical family making $50,000, ending that tax break will mean a $1,000 tax increase. So, while the White House likes to claim that its proposals would reduce taxes by $2,200 for that family, the net effect of the two tax changes actually would be a reduction in taxes of $1,200. (Alternatively, if Obama’s plan fails to pass the House of Representatives, that family will see a tax increase of $3,200, not $2,200.)

Indeed, the White House Web site continues to brag that the president last year fought for “middle class tax cuts to prevent a typical working family from losing an average of $40 per paycheck, enabling them to keep about $1,000 of their hard-earned money.” That sentence is referring to the payroll tax cut.

 A White House official argues that a) the debate currently is about income taxes and no one is trying to solve all outstanding tax issues and b) the payroll taxes were always known to be temporary. In contrast, this official argued, the Bush tax cuts — at least for the middle class — were always supported as being permanent, even though Congress did not write the law that way. (Got that?)

However, the White House’s Web site still refers to the previous payroll tax cuts as “tax cuts.”

 Meanwhile, keeping the focus on income taxes also allows the president to avoid talking about another pending payroll tax contained in the health care law — a 0.9 percent Medicare surtax on incomes over $200,000 for individuals and $250,000 for couples filing joint returns. (We had missed Obama’s line, referring to Clinton era tax rates, until it was highlighted by our colleague Jennifer Rubin on Wednesday.)

The Bush tax cut set the top income-tax rate at 35 percent, and Obama would restore it to the 39.6 percent rate set during Clinton’s presidency. But while Social Security taxes are capped, there is no cap on Medicare payroll taxes — also legacy of Bill Clinton’s 1993 deficit-reduction deal.

 Currently, the Medicare payroll tax is 2.9 percent, split between employers and employees, but most economists assume some of the employer’s tax payments result in lost wages for the employee. So the health-care surcharge would be on top of that, resulting, as we previously have noted, in a marginal tax rate nearly as high as 45 percent for the wealthy.

 

The Pinocchio Test

 For obvious reasons, the Obama White House does not want to highlight the pending increases in payroll taxes. The health-care law is still not especially popular, even with Obama’s victory at the Supreme Court. Meanwhile, it is not good politics to note that the looming increase in the Social Security payroll tax will reduce the size of the middle-class tax cuts that the president is promoting on the campaign trail.

 But for ordinary Americans, the net effect on the paycheck is ultimately what counts. If the White House is going to brag about payroll tax cuts in a report touting its tax-cut plan for the middle class, it should openly acknowledge that a good chunk of those promised tax cuts will disappear when the payroll tax cuts lapse.

 Two Pinocchios

 


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    About the Blogger

    Glenn Kessler has covered foreign policy, economic policy, the White House, Congress, politics, airline safety and Wall Street.

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