Cutting the Payroll Tax

In response to the Reformocon tax proposal, some conservatives have offered the alternative of cutting the payroll tax. Unlike the Reformocons, these particular conservatives have not organized a concerted media campaign to push a payroll tax cut plan, and so payroll tax cuts are getting less media play. Nonetheless, the plan deserves some comment.

As a preliminary matter, it's worth noting that the "payroll tax" is not one tax. There is the Social Security tax (12.4% of personal earnings up to $118,500) and the Medicare tax (2.9% of personal earnings). The precise distributive impact of cutting the "payroll tax" depends in part on which of those two taxes would actually see the rate reduction.

In any case, people stand to benefit from a payroll tax cut in direct proportion to their personal earnings: the richer you are, the more you benefit from the cut. For example, consider the following distributive breakdown of a payroll tax cut consisting of a 0.5 percentage point cut in the Medicare tax and 0.5 percentage point cut in the Social Security tax:

Both the Reformocon plan and payroll tax plan are inegalitarian and provide bigger income boosts to richer families than poorer families. But, because the Reformocon plan uses tax credits rather than rate cuts, it's not as inegalitarian as any payroll tax cut plan would be.

Both the Reformocon plan and payroll tax cut plan seek to reform fiscal policy so as to change the distribution of the national income. But in both cases, they ignore the most pressing distributive problems in the US. Even prior to the Great Recession, it was the bottom 20 percent of Americans that faced the most distributive hardship relative to other developed countries (click image for larger version):

Using this absolute measure, the 5th percentile of Norwegians are 71% richer than the 5th percentile of Americans. For Danes, it's 63% richer. And so on. Using relative distributive metrics (as opposed to these absolute income measures) shows an even greater deprivation of the poorest fifth of Americans.

This low-end deprivation is especially true for children, a relevant consideration for the Reformocon proposal that is so focused on children (click for larger version):

Americans (children and generally) at the 50th percentile and above have the highest absolute disposable incomes in the world. Distributive policy changes that merely pump up their distributive incomes while intentionally excluding the poor from income increases make very little sense.

Given where our national distribution currently is, it makes more sense to pursue distributive policy changes that boost lower class and middle class incomes together. To make such boosts politically palatable, implementing them via universal benefits that help smooth the financial shocks of specific life events for all families is also probably the way to go. There are a lot of policies that fit this bill (e.g. a universal monthly per-child cash benefit), but no political party currently pushing any of them.