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Cut taxes for the 47 percent

122716 Editorial
It's a simple idea: help the working poor take home more money by deducting less from them. (AP Photo)

In a wealthy country, a man should be able to feed and house himself before the government starts taking a cut of his income. A woman should be able to pay the bills before she is forced to contribute to Warren Buffett's retirement.

A young family shouldn't have to give up a chunk of their weekly income while they're still below the poverty line.

Yet that's what Franklin Roosevelt's payroll tax demands of America's working poor, a tax on the very first dollar. Republicans ought to take their paring knife to this regressive, work-punishing, employment-discouraging, half-hidden tax in 2017.

Donald Trump defeated Hillary Clinton with a distinctive populist message that pledged to put the regular guy ahead of the wealthy and well connected. He also campaigned on the GOP standard of tax cuts. Famously, he pledged to be the greatest jobs president God ever created.

To do this without increasing government dependency, cut taxes and get the government out of the way of small businesses, medium businesses and large businesses looking to hire, Trump and the GOP ought to set their sights on payroll taxes.

For most families, federal taxes make up a minority of the taxes they pay. State and local taxes, including sales taxes, are half or most of the taxes for the lower 40 percent. Congress can't do much about those. And the lowest two quintiles mostly doesn't earn enough to pay any federal income taxes, so cutting those won't do anything for this group.

The lower-income half of the country, Mitt Romney's famous 47 percent, pay plenty to Uncle Sam, however, in the form of payroll taxes.

On every dollar a working-class earner makes, Washington takes 6.2 cents for Social Security and 1.45 cents for Medicare. (The Medicare rate is higher for wealthy people, and the Social Security tax disappears after an earner's first $120,000 or so.) This is only half the actual payroll tax, though.

Employers have to pay an equal or greater amount to Medicare and Social Security for each worker. The "employer share" is a hidden tax on the employee, because employers generally pass through that tax in the form of lower wages.

Democrats say Congress can make work more lucrative by increasing the minimum wage, but that policy is rife with unintended consequences. Some conservatives are tempted to increase federal benefits for the working poor. But whenever politicians are trying to solve a problem, they should always begin by instead asking "how is government exacerbating this problem" rather than by trying to create new programs.

So it's a simple idea: help the working poor take home more money by deducting less from them. First, a payroll-tax cut would instantly increase workers' take-home pay. Second, if Congress cuts the employer share of payroll taxes, this will probably lead to wage hikes. Third, employers will find it cheaper to hire people, making this a job-creating tax cut.

This would spur employment and welcome many people back into the labor force by increasing the financial advantage of being in gainful employment. Currently, jumping from unemployment and food stamps to a job and an income isn't always a good financial move. Some people at the bottom of the heap are thus in a poverty trap. Wage increases and lower taxes achieved by cutting payroll taxes would lessen this problem.

The main argument against cutting payroll taxes is that this would "bankrupt Social Security," or Medicare. The premise here is an accounting fiction. Since last decade, Social Security spending has exceeded Social Security tax revenue, meaning that the marginal dollar of Social Security spending already comes from the general fund. This will continue for the foreseeable future. Cutting payroll taxes no more endangers Social Security than any tax break or spending increase does.

The 2012 payroll tax cut involved lowering the tax rate by 2 points. Here's another way to do it: Create a personal and dependent exemption from the payroll tax. Just as you owe no federal income taxes on your first $4,000 (even without deductions), the payroll tax shouldn't kick in until a worker has already earned a few thousand dollars. Workers with dependents should get a higher exemption.

If Republicans want to cut taxes in 2017, 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.