Wednesday, June 25, 2008

Obama and the inequities of payroll taxes

Obama is under fire for his plan to raise FICA payroll taxes on high earners -- by former Bush economic adviser Lawrence B. Lindsey here and former Bill Clinton speech writer and current New York Post columnist Dick Morris here.

The present income cutoff for the 6.2% Social Security tax and the 1.45% Medicare tax is $102,000. Obama's plan would keep the ceiling on those who earn between $102,000 and $250,000 and re-impose it on incomes above $250,000 (about 3% of all wage earners).

The debate over Obama's plan should open up a wider discussion about the basic fairness of payroll taxes. They hurt low wage earners most. A worker who earns less than the median income of $32,140 gets $2,456 lopped off the top of his wages. That could be as much as he pays in income taxes. Add the employer's share of payrolls taxes, and the total could be double what the worker pays in income taxes.

Matthew J. Slaughter, who was on President Bush's Council of Economic Advisers from 2005 to 2007, thinks payroll taxes should be eliminated for workers making less than the median income, with the gap closed by raising the current $102,000 ceiling. Slaughter says such a move would put an average of $3,800 in the pockets of the 67 million low wage earners -- much more than the tax breaks proposed by Obama.

Present payroll taxes also punish entrepreneurs, who have to pay both employee and employer payroll taxes -- for a total of 15.3% on income up to $102,000. Under Obama's plan, they would be punished more. They'd have to pay that 15.3% on all additional income above $250,000. And that would be on top of other tax hikes Obama proposes for the top 3% earners. Raise the cap on payroll taxes, but do it without punishing entrepreneurs more, and make it a true "cap" by setting a taxable income ceiling.

Obama has changed his mind about his former pastor, the Rev. Jeremiah Wright (he has condemned his views), and public financing of presidential campaigns (he has opted for no-limit private financing because the public system is "broken"). He should look hard at the inequities of payroll taxes, and modify his tax plan accordingly.

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