A major strategist in John McCain’s campaign was asked privately this week whether his candidate might propose cutting the payroll tax. "Yes," came the reply. "No problem. Not a big deal." He was wrong on both scores. Cutting the payroll tax, which funds Social Security, is not easy but offers a rich economic prize in this lean Republican year.
Republicans have been wary of touching the Social Security third rail of politics, ever since a re-elected President George W. Bush abandoned his reform under withering Democratic fire. Moreover, Republicans talk about offsetting payroll tax revenue loss by cutting future Social Security benefits, which contains seeds of electoral catastrophe.
Neither McCain nor his advisers seem to realize the value of the political prize that they can grasp. The regressive payroll tax oppresses most Americans, especially young men and women, and burdens small businesses that must match the tax that their employees pay. With dogma-bound Democrats unable to remedy this, the GOP has an opportunity to reach out beyond top-bracket taxpayers, big business and high finance.
About 41 percent of Americans have no income tax liability or do not file a return. But every wage-earner is hit by the payroll tax, amounting to more than they pay in income taxes for 86 percent of them. Young people are stunned when they find out how much is withheld from their first paycheck, labeled FICA. As they marry, have children and earn more money, they hate the 6.2 percent taken out of their first $97,500. In 1990, then-Sen. Robert Kasten, R-Wis., wrote, "These excessive taxes have struck at the heart of the American family."
In the two decades since then, few politicians of either party have addressed the payroll tax. It is not the concern of K Street’s rich tax lobbyists. The late Democratic Sen. Daniel Patrick Moynihan was a voice in the wilderness calling for reductions. In 1998, during my only protracted private conversation with Bill Clinton as president, he responded to my questions by expressing concern over the payroll tax, but never followed up.
When economic advisers of the presidential candidates gave their formulas for "turning the economy" around on the Washington Post op-ed page Monday, McCain’s Douglas Holtz-Eakin barely mentioned tax cuts — and nothing about the payroll tax. An economist who once headed the Congressional Budget Office, he wrote a dense, non-political account that was absentmindedly cleared by the campaign’s managers without serious consideration. Indicating that the undermanned McCain campaign is not ready for prime time, the senator’s own economic speech in Orange County, Calif., a day later was no better.
Politicians generally are ignorant about the payroll tax. The McCain insider who said a payroll cut would cause no problem did so because he thought that the senator proposed that during his 2000 candidacy. In fact, McCain had proposed a 20 percent diversion of the tax’s proceeds to fund private accounts, an idea that is now a political dead letter. Sen. Barack Obama has been described in the press as advocating a payroll tax cut, but that is not true, either. His tax plan would try to ease payroll pain with a $500 income tax credit.
Even Republican advocates of cutting the payroll tax talk about offsetting it with reduced future benefits. That’s a bargain young workers would buy in a minute, and current Social Security recipients would be assured that their pensions would not be reduced one penny. Nevertheless, Democrats would feast on any Republican hint of slashing old payments.
The perceived need to offset payroll tax revenue losses stems from belief that the Social Security fund must be replenished. The truth is that there is no such fund, and the heavy payroll tax revenues resulting from the Greenspan Commission’s 1983 "reform" not only provide enough money for Social Security but fund other programs, as well.
As part of Democratic obsession with making a progressive tax system still more progressive and redistributing income, Obama actually would raise the $97,500 cap on the payroll tax, and his $500 tax credit would not change payroll tax withholding for employee or employer. There is an open field for John McCain, if he has the wit and will to enter it.