A Payroll Tax Cut Makes Political and Economic Sense

Entitlement programs would not have to suffer unduly as a result

The words "provocative" and "revolutionary" are normally not used in the same sentences as "Bob Dole." Unfortunately for Mr. Dole, his languishing campaign needs to come up with some provocative, revolutionary ideas to seize voters' attention and show that he is running for president for reasons other than "every country needs a president" (as he told talk-show host David Letterman).

As a Republican, a nice juicy tax cut, part of a "pro-growth, pro-opportunity" agenda, would seem to fit the bill. And there is no lack of other tax-cut ideas coming from every direction in the party. These include a child tax credit, a charitable contributions tax credit, a capital gains tax cut, consumed-income taxes, and a whopping 15 percent across-the-board income tax cut.

There are two problems with the tax-cut scenario. First, Americans are increasingly skeptical about the benefits of tax cuts, especially if they lead to higher deficits. In a recent USA Today/CNN/Gallup poll, only 23 percent of Americans said they want a tax cut if it means increasing the deficit. An NBC News-Wall Street Journal poll echoed these results, with 10 percent of respondents citing taxes as the most important issue in this election.

Even Dole is skeptical of the benefits of tax cuts. He is a balance-the-budget Republican, not given to Laffer curves and economic magic bullets. Yet Dole could find a way to reduce taxes; provide for increased economic security; and improve saving, investment, and long-term economic growth if he shifted his focus from income taxes and proposed reducing the payroll tax.

There are several reasons why cutting the payroll tax makes sense politically and economically. Politically, it's a way to cut taxes across the board without disproportionately benefiting the wealthy. Since the payroll tax is levied on only the first $62,000 of wages, it puts a greater burden on lower- and middle-income workers. The benefits of this tax cut would extend to everyone who works, rich and poor alike.

A cut in the payroll tax also would give a strong boost to the economy. Because payroll taxes in effect tax work, they are wage and job killers. One need only look at the dismal employment record in Europe to understand the crippling effect high payroll taxes has on job creation.

How high is the current payroll tax? More than 15 percent of wages. Three-quarters of Americans pay more in payroll taxes than income taxes. Since 1950, it has been increased 17 times, an average of about 3 percentage points per decade. These tax increases have skewed our tax system against working families and in favor of retirees. A family of four earning $30,000 currently pays about 10 times more in federal taxes than a retired couple with the same income.

The payroll tax collects more revenue than it needs to fund its programs, which include Social Security, Medicare, and disability. In fact payroll taxes brought in $60 billion more in 1995 than was paid out in Social Security, Medicare, and related programs.

A reduction in the payroll tax would have broad bipartisan support. As Democratic Sen. Bill Bradley recently told The American Enterprise magazine, "Social Security is the most regressive of our taxes, and some thought should be given to whether the rates should be reduced."

If a cut in the payroll tax makes economic and political sense, why isn't anyone suggesting it? Two words: Social Security. Because the payroll tax is the funding source for our major entitlement programs, any suggestion to reduce it implies that our sacred-cow entitlement programs are on the chopping block.

Yet a payroll tax cut could be a first step in addressing the crisis facing entitlement programs, especially Social Security. A tax cut could be fashioned in such a way as to increase personal savings and give people greater economic and financial security. Sens. Bob Kerry and Alan Simpson have devised a plan that would reduce the payroll tax by 2 percentage points and allow workers to direct that money into Individual Retirement Accounts.

Dole could couple a payroll tax cut with either a requirement to invest the savings in an IRA or a more-favorable tax treatment of savings that would entice people to save more. This would help Americans build up their low level of financial assets and address their economic anxiety.

Would a payroll tax cut allow Social Security and Medicare to "wither on the vine?" Only if you believe that the entitlement problem exists because the government is not bringing in enough money to fund the programs.

Over the next 40 years, the cost of Medicare and Social Security will grow from 16.8 percent of worker payroll to between 33 to 55 percent of payroll. According to the Bipartisan Commission on Entitlements and Tax Reform, absent policy changes, entitlement spending and interest on the debt will consume almost all federal revenues in just 14 years. Our high payroll taxes have allowed Congress and the administration to perpetuate the fantasy that we can delay reforming entitlements until some point in the distant, foggy future.

Several bipartisan proposals would curb the growth of entitlements without burdening senior citizens. One proposal would means-test benefits. Currently $15 billion in Social Security benefits goes to seniors with retirement incomes over $100,000. Some $60 billion goes to seniors with incomes over $50,000. Another proposal would gradually increase the retirement age to better reflect life expectancies. A third would reduce the cost-of-living adjustment, since most economists believe the Consumer Price Index overstates inflation.

A payroll tax cut, combined with modest reductions in current and future entitlement spending, would go a long way toward putting the US on a track toward sustainable economic growth. This kind of bold proposal would require real leadership. So far, few in Washington have been willing to step into that vacuum. If Dole were to do that, it might be just the kind of bold jump-start his campaign needs.

*Brian N. Blackstone is an economist and freelance writer in Washington.