What'choo talkin' 'bout Hendrik?
March 20, 2009 7:27 AM   Subscribe

Who's talking about a payroll tax holiday? Not just the insane.

This is not a new idea. Folks have been arguing the pros and cons (yeah, that's him) of such a tax holiday for years, former Senator Pete Domenici proposed a one month social security tax holiday in 2001. In light of the current economic turmoil the idea has been getting new traction. From who? Well, from a lot of people. David Frum, Mitch McConnell, the National Federation of Independent Businesses, some economists. The idea is intriguing, even radical. In the past some liberals have supported the idea of reduced payroll taxes, Al Gore for example. Would it work? Would it help? Not everyone thinks so .
posted by IvoShandor (37 comments total) 2 users marked this as a favorite
 
You know what would be a bigger boost to both me and economy than removing my payroll taxes? Removing my payroll health insurance deductions. And then I could even go to the dentist!
posted by DU at 7:30 AM on March 20, 2009 [1 favorite]


A whole good idea would be to make a payroll-tax holiday the first step in an orderly transition to scrapping the payroll tax altogether and replacing the lost revenue with a package of levies on things that, unlike jobs, we want less rather than more of—things like pollution, carbon emissions, oil imports, inefficient use of energy and natural resources, and excessive consumption.

That's interesting. Don't tax me for working, but tax me for buying an Escalade or a diamond necklace or a 60 inch plasma TV. I am usually pro-tax because I think government, for the most part, spends money on things that money deserves to be spent on, but I might could get behind this idea. I think the devil in the details would be deciding what are the "things that, unlike jobs, we want less rather than more of".
posted by ND¢ at 7:44 AM on March 20, 2009 [5 favorites]


I was coulda was likin' this all along . . . but I'm biased. I need the cash.
posted by IvoShandor at 7:45 AM on March 20, 2009


"things that, unlike jobs, we want less rather than more of"

On the contrary, this just buys into the conservative frame of taxes being an inherently bad thing. Taxes are not a form of punishment, they are a form of cooperation.

That's not to say we shouldn't shift taxes from payrolls to luxury purchases. But don't do it because we don't want luxury purchases to happen. Do it because we are supposed to be taxing progressively and luxury purchases are an indicator of higher income.
posted by DU at 7:51 AM on March 20, 2009 [9 favorites]


DU: Yes -- along with this whole thing ought to go some effort toward legislating by legislating, rather than by fiddling with our already absurdly baroque Winchester Mystery House of a tax code.
posted by rusty at 7:56 AM on March 20, 2009 [2 favorites]


don't do it because we don't want luxury purchases to happen

To me, that is something I "unlike". That said as ND¢ pointed out the devil is in the details. Eventually, this winds up backfiring? Maybe. It gives people/businesses incentive to avoid those things that are unlikable. But again, I need the cash. I'm as liberal as they come, but I can't argue with money in my pocket when I haven't been able to afford groceries in three months.
posted by IvoShandor at 7:56 AM on March 20, 2009


And by groceries I mean, big piles of food, I'm gonna shut up for now, but I can't stay out of this discussion.
posted by IvoShandor at 7:59 AM on March 20, 2009


This is the smartest thing Frum has been saying lately - I wish I was surprised that others haven't jumped on the bandwagon, but considering that he's a conservative that's mildly disliked by liberals, and just about hated by Republicans, I can't be.

Don't tax me for working, but tax me for buying an Escalade or a diamond necklace or a 60 inch plasma TV.

Yeah, I love the idea of a VAT/consumption tax in the US, with a few things (food/housing/clothing) excepted. The problem is that in the switchover from our current system to a consumption tax, older people get screwed - they've been taxed on their income, and now they're going to be taxed on how they spend it in retirement. I haven't come across anyone with a good solution to this, but I know there are people around these parts that are much more tax-savvy than I. So I'll wait for someone to explain.

Oh, and of course, I mean instead of an income tax.
posted by god hates math at 8:05 AM on March 20, 2009


This is an excellent idea if you want americans earning money to spend it. I was only able to recover about half the total deductions from my wife's and my paychecks on last years tax returns. A payroll tax holiday would significantly increase our household income! Their ideas in that article about the positive impact payroll tax reform would bring to Social Security etc are welcome to us 50 somethings too. I'm democrat but I don't give a fuck who brings these things to the table in congress, they just need to get it done. Now.
posted by gigbutt at 8:06 AM on March 20, 2009 [1 favorite]


I don't know if I agree that we should legislate rather than tax. I mean, why outlaw something when you can just disincentivise it? Obviously some things should be completely outlawed, you shouldn't be able to pay a million dollar tax and commit murder, but if a person is willing to pay $10 a pack for cigarettes and not do it around other people, then why not let them smoke? If we tax stupid and dangerous things and use the money to fund public education and universal healthcare then it could work to improve social mobility. The rich can afford to pay the taxes to buy crack and the tax money is used to send a poor kid to college. The rich guy dies from an overdose and the poor kid takes his job. Everybody wins.
posted by ND¢ at 8:10 AM on March 20, 2009


I'm only for shifting taxes from payroll to sales tax if we keep the capital gains tax.
The lower you are on the salary scale, the more likely you are to spend your entire income every year. If we only tax spending, you're giving a tax reduction (or at the least, a tax deferment) to anyone who can afford to save. Not that saving is a bad thing, but at the high end of the scale, this a huge tax cut for those who least need it.
posted by ShadowCrash at 8:16 AM on March 20, 2009


Silly people. Don't you understand how the US works? Tax cuts are for the rich!
posted by eriko at 8:17 AM on March 20, 2009 [2 favorites]


Here in Ontario, Canada with our 13% sales tax most vendors are willing to eat the tax if buyers pay cash. There may be legit reasons for this (like avoiding credit card fees), but the most common one is that the vendors end up not paying the tax or underreporting the value of the goods to pay less tax than they should. This costs billions that governments have to make up through other means. It would be interesting to see what would happen if luxury/consumption taxes replaced income taxes in some other country but I wouldn't want to try it out first here.
posted by any portmanteau in a storm at 8:19 AM on March 20, 2009


Who's talking about the secret encoded messages that Vince from Shamwow is sending me in his commercials about the plot to control the minds of young Americans through a frequency embedded in the AAC format used on iTunes to create an army of genetically modified supermen who will colonize and repopulate Mars? Not just the insane.
posted by Horace Rumpole at 8:20 AM on March 20, 2009


Well, from a lot of people. David Frum, Mitch McConnell, the National Federation of Independent Businesses, some economists. The idea is intriguing, even radical. In the past some liberals have supported the idea of reduced payroll taxes, Al Gore for example.

I thought you said it wasn't just the insane?
posted by Pollomacho at 8:20 AM on March 20, 2009 [3 favorites]


Don't tax me for working, but tax me for buying an Escalade or a diamond necklace or a 60 inch plasma TV.

This just sounds like the FairTax with eco-friendly excise taxes thrown in. The income tax is flawed, but repealing it and replacing it with something different will also have problems, there is no easy solution.

The sales tax rates and/or excise taxes would have to be insanely high in order to replace income tax revenue, and it would be a lot harder to keep the system as progressive as it is today in a new system. The net result in most cases would be that average people would take home a higher percentage of their paycheck, but be able to buy less things with it than they could before the new sales tax. If we only shift those new taxes onto cars or TVs and the like, it will have a lot of consequences like people simply avoiding those kinds of purchases (which would mean little or no tax revenue), companies that sell those products losing massive amounts of money, etc.

If someone has a detailed plan for how to get rid of the income tax, still get the same amount of tax revenue, and have some kind of positive benefit that the current system lacks, I'd like to see it. Otherwise, I would suggest tweaking the current system (such as the recent decision to bump the tax rate for the highest tax bracket a few percentage points).
posted by burnmp3s at 8:34 AM on March 20, 2009


How about, like grownups, we scrap the regressive payroll tax and replace it with more progressive (and, yes, higher for some) income and capital gains taxes instead of an ever-more-byzantine "package of levies" on whatever infelicity catches some legislator's eye? Why exactly is that so difficult?

I mean, why outlaw something when you can just disincentivise it?

Because having your government dependent for a third of its revenues on behaviors and business practices which it is in theory attempting to discourage seems fairly certain to result in perverse incentives all around?
posted by enn at 8:40 AM on March 20, 2009


Here is the link that is supposed to be on "one month social security tax holiday in 2001". I forgot how temporary the THOMAS links were. The above leads to the search page, just CTRL+F "payroll tax", the proposal was S.1717. Sorry about that.
posted by IvoShandor at 8:43 AM on March 20, 2009


How about, like grownups...

FAIL. Any sane reworking of the tax code is going to result in the rich paying more. And the rich run most of the media and political processes. They have every incentive to muddy the waters, which is to say not act like grownups.
posted by DU at 8:52 AM on March 20, 2009


Am I the only one who senses a Trojan Horse in this proposal? The Republicans have been yelling for years about Social Security "going broke," as an argument for privatizing it. Their problem is that it's not going broke. Stop collecting Social Security taxes, however, and everything changes - now it is going broke! Now we have to radically restructure it!

A smarter approach would be removing the income cap, so earnings above $100K are taxed, then adjusting the rate to produce the same revenue (or more, to keep Social Security solvent practically forever).
posted by Kirth Gerson at 8:56 AM on March 20, 2009 [4 favorites]


Am I the only one who senses a Trojan Horse in this proposal?

I thought about that. Maybe so. Depends on how revenue is replaced, right? Social Security is probably safe, just look to the resistance W. saw on his grand plan to restructure/privatize social security. Fucking with one of the government's most popular programs is a sure fire way to get people all riled up. Pitchforks and torches riled up. Any politician with half a brain (so the dems and a handful of repubs - so funny, I know) wouldn't touch social security, unless they didn't like their job.
posted by IvoShandor at 9:03 AM on March 20, 2009


"A smarter approach would be removing the income cap, so earnings above $100K are taxed"

I was thinking the exact same thing. Why on earth cap the percentage above a certain amount anyway? The idea is fundamentally regressive.

It's actually possible to create a flat tax rate that generates more revenue than the current tiered rate system. BUT - you have to close "loopholes" that only people with large amounts of income can and do take advantage of.

I am not optimistic that this can be done. There are many, many people who really want the system to be complex and arcane. Which is also what DU said a moment ago.
posted by Xoebe at 9:08 AM on March 20, 2009 [1 favorite]


There are good aspects to national sales taxes, but it makes for a highly variable revenue stream--especially if it is differentially skewed towards "luxury" purchases. Just look at California for an example of the dangers of over reliance on sales tax revenue.
posted by yoink at 9:20 AM on March 20, 2009


"I'm only for shifting taxes from payroll to sales tax if we keep the capital gains tax."

Short term capital gains should be taxed like ordinary income. Long term should get a break, as an incentive.
posted by krinklyfig at 9:26 AM on March 20, 2009


I like the idea of consumption-based taxes, as long as the taxes are spent on things related to the item being taxed. E.g., gas taxes should pay for the negative externalities of burning fossil fuels for transportation (air pollution, regulatory infrastructure, possibly a big chunk of national defense and the State Department), tolls should pay for road maintenance, etc. The only things you should have "general taxes" for are those things that really are general public goods that everyone benefits about equally from.

That said, I don't trust the government to ever implement them; taxes created for one purpose would too easily get siphoned off for another, and very quickly I think we'd have a worse morass of taxes than we do right now. Plus I don't like the social-engineering aspect of things. I have no problem with government ensuring that the price paid by a consumer of a particular good or activity includes all its costs, especially those that would otherwise get picked up by involved parties, but the last thing I'm interested in is more "sin taxes" assigned arbitrarily to whatever the monkeys in Washington think is unpopular this week. Keep in mind who'd be creating those taxes: chances are we're not going to have the current government forever, and the pendulum swings between liberal and conservative every few years. Without tight controls ensuring that various excise taxes could only be spent on costs actually associated in some rational way with the use of that good, we'd have ludicrously high taxes on reproductive-health services, condoms, sex toys, and demon liquor.

In considering a tax policy, bear in mind what it would look like when someone you really hate gets their hands on the levers of power. Taxing "things we want less of" sounds like a great idea when it's taxing SUVs and plasma TVs, but the next time the Jesus Brigade comes into power — and they will — that's not what they see as the source of all evil, and that's not going to be what they tax if given the power.

Also, the make-or-break with a consumption-based tax scheme would be the changeover. As much as I like the concept, there's no way I — or a lot of other people — are going to support such a thing if it results in double-taxation. You'd need to figure out a way of giving a tax rebate for people who are spending money that was earned when income taxes were in effect, and that they already paid their share of. This is not at all trivial: there are probably billions of dollars saved in Roth IRAs and similar retirement vehicles that people are expecting to use for retirement; if you switched to consumption taxes and didn't have a rebate, you're double-taxing that money. That'd be a non-starter for sure.
posted by Kadin2048 at 9:31 AM on March 20, 2009


Correction:
I have no problem with government ensuring that the price paid by a consumer of a particular good or activity includes all its costs, especially those that would otherwise get picked up by uninvolved parties...
posted by Kadin2048 at 9:33 AM on March 20, 2009


Short term capital gains should be taxed like ordinary income

Actually, I'd argue that very short term capital gains -- say, less than 30 days, should be taxed at a substantial penalty, and very long term capital gains -- say, ten years -- should be taxed at a substantial discount.

One of the core problems of US Policy since 1980 has been to offer a substantial discount to short term thinking. That *needs* to change.
posted by eriko at 9:33 AM on March 20, 2009


This makes no sense at all. Here in America, we use taxes to punish people and to encourage them to stop doing something. We have alcohol, tobacco, and payroll taxes for this reason.

Seriously though, given that labor is the true engine of wealth, one would think that it would be something bordering on a sacrament. Taxing it should be an obvious evil. Wealth which is generated without labor, eg. inheritances and rents, should be a prime target for steep taxation, while labor should be tax free, both for employers and employees. Heck, if anything labor should be subsidized.
posted by mullingitover at 10:32 AM on March 20, 2009


Just look at California for an example of the dangers of over reliance on sales tax revenue.

Especially when cities become overly reliant on a single sector for sales tax revenues: Auto dealers close, cities lose revenue.
posted by We had a deal, Kyle at 10:38 AM on March 20, 2009


To boost the economy I propose that we tax all foreigners living abroad.
posted by caddis at 11:12 AM on March 20, 2009 [1 favorite]


I would tax Raquel Welch.
and I have a feeling she'd tax me.
posted by Horace Rumpole at 11:24 AM on March 20, 2009


I certainly like the idea of paying less in payroll taxes, as it happens they amount to slightly more than my income tax burden.

But a "consumption tax" is just another way of saying "National Sales Tax", and that means "screw the poor". All sales taxes are inherently regressive. I spend pretty much 100% of my income, less only what little I can try to save. Bill Gates spends, at absolute most, 1% of his income.

So, under the so-called "Fair Tax" 100% of my income is subject to taxation, while only 1% of Bill's is. How the hell is that fair?

The only tax system that makes any sort of sense is a progressive tax. Take 30% of my income and it drops my standard of living. Take 40% and it really drops my standard of living. Take 30% of Bill Gates' income and he won't even notice. Increase his tax load to 40% of his income and guess what? He still won't notice. It won't have the slightest impact on his standard of living.

We should be taxing the rich more heavily not as a punishment but simply because a) they've got all the money, and b) it won't hurt them.
posted by sotonohito at 12:44 PM on March 20, 2009


A consumption tax encourages savings. Right now the velocity of M2 is sluggish to say the least despite an actual rise in M2. We need speed and that means spending, not saving.
posted by caddis at 12:59 PM on March 20, 2009


A whole good idea would be to ...replace the lost revenue with a package of levies on things that, unlike jobs, we want less rather than more of—things like pollution, carbon emissions, oil imports, inefficient use of energy and natural resources, and excessive consumption.

And if/when our pollution is reduced, carbon emissions are way down, oil imports are a trickle, energy is efficiently used, etc., what then? Where does the tax money come from then?

I'm all for the luxury item tax, but for the rest a backup plan for different taxation categories is essential; not now, but 10 or 15 or 20 years or so down the line.
posted by zardoz at 3:09 PM on March 20, 2009


So, under the so-called "Fair Tax" 100% of my income is subject to taxation, while only 1% of Bill's is. How the hell is that fair?

You're looking at the wrong side of the equation. Sure, Mr Gates wouldn't pay that tax when he makes the money, but he'd have to pay it when he spent it. That's the whole idea of a consumption-based tax. You can earn money and save all you want of it, but when you go to spend it on something, that's when you pay your share. And depending on what you spend it on, you might pay a little tax, or a whole lot.

Someone living basically paycheck-to-paycheck is going to take all their income, turn it around, and spend it mostly on necessities: housing (rent or mortgage), groceries, utilities, education, clothing, healthcare, inexpensive consumer goods, etc. None of those things are probably going to be taxed very heavily under most consumption-based schemes, so the marginal tax rate paid by someone with little income can be quite low.

Even if Bill Gates is only spending a small percentage of his personal income per year, I'm sure it's still a tremendous amount of money. And although I don't know the guy personally, I'm betting it's mostly not on college tuition or groceries. It's almost certainly spent in large part on luxury goods of one sort or another. Those are the things you could tax heavily; the result would be not only a higher amount of tax paid, but also a higher marginal rate per dollar spent overall. As you got higher and higher up into the rarefied air of ultra-luxury goods, the tax rates would get similarly higher. This is where most consumption taxes become, in essence, progressive.

The key is not to compare tax paid as a function of income, but tax paid as a function of spending. By taxing various goods differently you could make that as progressive or regressive as you wanted to.

Analyzing consumption-based tax schemes requires looking at the whole picture differently. It doesn't matter how much someone is making, if they're just taking it all and sticking it in a bank account or re-investing it somewhere. If a rich person wants to live like they're only making $40k/year and invest the rest, fine: savings and long-term investment are good things and we should encourage them, not punish them. If and when the money is spent on something tangible — because that's all money is good for — rather than simply reinvested or saved, it gets taxed.

Although I'm not necessarily in favor of heavily progressive consumption taxes for the reasons outlined in my earlier post above (I think it reeks of social engineering and creates a dangerously powerful government apparatus that's ripe for misuse by "well intentioned" crusaders), they are not as grossly unfair as you're making them out to be.
posted by Kadin2048 at 11:27 PM on March 20, 2009


Kadin2048 wrote I think it reeks of social engineering

I love it when people, especially Americans, complain about "social engineering" as if it were some dread evil that must be avoided at all costs. What do you think our Constitution is if not an exercise in overt social engineering? The Senate existing as a deliberately more powerful and prestigious body to act as a conservative [1] anchor against the House, with a President elected by means of a truly bizarre and complex "Electoral College"? You won't find a better textbook example of social engineering than the US Constitution.

But that's a side issue.

The key is not to compare tax paid as a function of income, but tax paid as a function of spending.

???

No. If you want to distort facts and make it look like the so-called "Fair Tax" is fair, that's the thing to do, but if you want to actually evaluate the fairness of a tax proposal then taxation as a function of income is the only method that makes any sense at all.

I don't care what Bill Gates spends. Why should I?

If and when the money is spent on something tangible — because that's all money is good for — rather than simply reinvested or saved, it gets taxed.

And right there is where, from my POV you go completely off the rails. The ultra wealthy don't spend much of their income on tangible things, they can't. Leaving aside absurdities like solid gold toilets it really isn't possible to spend as much money as Bill Gates has on material stuff. But your favored taxation scheme very conveniently doesn't tax what Bill and his buddies do buy: intangibles. Stocks, bonds, etc. Nope, those are all completely tax free under the so-called "Fair" Tax.

How nice. You want to tax what I buy heavily (and the tax rate on food and suchlike would have to be insane to provide the same money that the government currently gets under income tax, let's not fool ourselves), but the stuff the rich buy is completely tax free. Yet you call this a "Fair Tax".

And that, right there, is why you and yours will never sell the "Fair Tax" no matter how many lying books are published on the subject. Because essentially you're proposing exempting 90% or more of the money the ultra wealthy make from any taxation at all, and shifting that burden down to everyone else.

Naturally you want us to evaluate taxation from a bizarre and completely nonsensical standpoint, its the only way the "Fair" Tax makes any sense at all. If you squint just right, while looking into a mirror through a prism while standing on your head its perfectly fair!

[1] In the resistant to change sense.
posted by sotonohito at 4:25 AM on March 21, 2009


The ultra wealthy don't spend much of their income on tangible things, they can't. Leaving aside absurdities like solid gold toilets it really isn't possible to spend as much money as Bill Gates has on material stuff. But your favored taxation scheme very conveniently doesn't tax what Bill and his buddies do buy: intangibles. Stocks, bonds, etc. Nope, those are all completely tax free under the so-called "Fair" Tax.

The whole point of a consumption-based tax is to punish consumption and not punish savings or re-investment. That's what purchasing stocks, bonds, CDs, or just stuffing money in a bank account is: it's re-investment. That's generally regarded to be a good thing.*

So if someone makes a million bucks but only spends $100k and saves the rest, they only get taxed on the $100k. That's not unfair, and they're not really avoiding taxation, they're just deferring it. They're deferring it until they spend it on something tangible. If they don't spend a lot, they don't get taxed a lot: that's by design. The idea behind most consumption-tax proposals is to discourage profligate spending. You get taxed on your lifestyle and on material trappings and displays of wealth, not on your income or bank account balance.

However, "intangibles" that are actually not investments (purchase of intellectual property, perhaps?) and that aren't generally beneficial versus regular old physical-good consumption should be taxed under a consumption scheme.

Of course, the whole premise of a consumption-based tax is that consumption is bad and should be discouraged, and savings is good and ought to be encouraged. (Nearly the reverse of our current system, which blatantly encourages consumption in order to fuel growth.) If you disagree with this then certainly the whole thing looks backwards.

Personally I think the premise is correct and the hearts of the Fair Tax people are in the right place, but it'll never happen. The world, and the West in particular and America especially, is addicted to consumption-focused growth economics, and I don't see any serious chance of that changing. My gut feeling is that we'll take growth economics right to the absolute limit of ecological sustainability and perhaps beyond that, until we are forced by circumstances completely beyond our control to figure out an alternative. I am doubtful we'll hit that in my lifetime (although we'll probably start to see the signs, and ignore them), rendering all conversations about alternatives to growth mostly academic. But they're interesting anyway.


* Admittedly, the purchase of stocks on the secondary market isn't a direct investment in the same way that purchasing bonds, or keeping your money in a bank account, is; it doesn't create credit that can be lent out. I might be willing to concede that this is actually akin to consumption and ought to be taxed under a consumption-based scheme for that reason, although I haven't given it a lot of thought.
posted by Kadin2048 at 1:19 PM on March 23, 2009


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