Thursday, November 18, 2010

Soak the poor!

It has been one of the fondest dreams of plutocrats, big business, and libertarian think tanks for the better part of the last hundred years to replace as much of the income tax as possible with a national sales tax, the better to shift the tax burden from the whiny wealthy to the uncomplaining multitudes. Coolidge's and Hoover's Treasury secretary, Andrew Mellon, pushed the idea in the 1920s; in 1932, with the budget deficit approaching 60 percent of expenditures, members of both parties endorsed a national sales tax in the face of strong urging by industry and the "experts" of the need to balance the budget at all costs. Only a mass revolt by the public — mail poured into congressional offices opposing the idea — stopped its final passage.

Still, libertarian think tanks like Cato periodically dust off the notion and extol its wonders (they are particularly enamored of the the idea that with a sales tax, individuals get to "choose" the amount of tax "they are willing to pay" by deciding how much to spend).

Now, the latest entry from the burgeoning number of do-it-yourself-solve-the-deficit committees has  proposed a 6.5 percent "Debt Reduction Sales Tax" — once again seeking to use the Federal budget deficit as an opportunity to rally around this egregiously regressive form of taxation.

The one good thing is that people are also beginning to talk about increasing the income limit subject to Social Security payroll tax; currently only the first $106,800 of income is subject to the 6.2 percent payroll tax (12.4 percent for us self-employed persons which, along with paying for all of your own health insurance, are two of the great joys of being your own boss); everything after that is tax-free, which as a tax policy that has always been completely nuts, if politically explainable.

The highly regressive effect of the payroll tax means that those in the lower brackets pay a much greater percentage of their total income for payroll taxes than do the higher brackets, and contribute a substantially greater percentage of the total revenues collected. Here's a chart I compiled (data from the non-partisan Tax Policy Center) showing the percentage of total payroll tax revenue and percentage of all Federal tax revenues (payroll, income, estate, corporate) contributed by each income bracket:

Another way to think about the regressive structure of the payroll tax is to calculate the effective tax rate by bracket; this chart shows the percentage of income actually paid on average by those in each bracket, comparing payroll tax and Federal income tax:

It is good that serious people are trying to initiate that much-talked of and so far little realized "adult conversation" about the budget. But the effort to use a sudden sense of crisis — much of that generated by the disastrous policies of those "fiscal conservatives" Reagan and Bush — to revive regressive tax schemes is a very old tune. A good place to start balancing the budget would be to restore the modestly higher marginal rates on the upper brackets that last brought us balanced budgets and even surpluses under Bill Clinton, eliminate tax loopholes, and shift the payroll tax to a more progressive structure by removing the $106,800 income limit. As the New York Times's do-it-yourself fix-the-deficit interactive calculator shows (you too can be infinitely more responsible than the GOP's "Pledge to America"!), that alone would close more than 3/4 of the short-term budget shortfall and half of the long-term gap.