It came to be known as Mitt Romney’s greatest error. During his 2012 run for president, the man now serving as Utah’s junior senator remarked at a closed-door fundraiser that 47% of Americans pay no income taxes and thus had no reason to vote in favor of tax cuts.
The statement was made out to be a lot worse than it was, but it proved fatal for Romney’s hopes. The idea that he would disparage or write off 47% of Americans fit perfectly into the reputation that the media had tried to create for him: as a heartless venture capitalist eager to outsource American jobs and capable even of giving people cancer by force of telepathy. Still, Romney was factually correct that a large number of Americans pay no income tax.
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But those lower-earning Americans do still pay taxes, from the very first dollar they earn. And the payroll tax is in fact regressive, a nearly 14% tax, most of which applies only to income below the threshold of $132,900.
We understand why politicians focus so keenly on marginal income tax rates. In the Democrats’ case, they cling to a belief that tax policy should send a moral message about the evils of riches. They are unbothered by the fact that top marginal tax rates, whether they stand at 29%, 39%, or 90%, have historically had no effect on government revenue. Republicans, on the other hand, want to reduce the top marginal income tax rate because they see it (correctly) as the main government-imposed bottleneck on the economy.
But tax policy isn’t just about economic growth. It’s also about taxpayers, including the lowest-earning taxpayers. That’s why President Trump is right to consider a cut to the payroll tax.
We recommended this course immediately after Trump’s election. At the time, we argued that a payroll tax “would instantly increase workers’ take-home pay,” “lead to wage hikes,” and “make it cheaper for employers to hire people.” And we specifically recommended that it be done through an exemption at the bottom of the pay scale. Trump should reduce the payroll tax by making it kick in for both employer and employee only after a worker has earned a few thousand dollars, with the exact amount varying according to each worker’s family size.
The Trump administration has long been trying to bring more people out of government dependency and into a workplace now brimming with job opportunities. One of the best ways to reduce government disincentives against work is to make work more profitable and more attractive for those at the very bottom of the income scale.
Some will argue that a payroll tax cut will endanger Social Security and Medicare. We don’t buy it. Although the payroll tax is billed as a dedicated funding stream for these entitlement programs, we all know that Congress just spends the money how it likes. Entitlement reform is an issue that Congress will have to tackle, but it is a separate issue that has no more to do with this tax cut than it would with any other reduced tax or increased expenditure.
As we put it nearly three years ago: “A payroll-tax exemption provides a big bang for the buck: It helps poor people, it encourages hiring and it encourages work, all without creating a new government program.” Our opinion has not changed.
