The Iron Law of Tax Cuts

Every time federal taxes have been cut–without exception, as far as I know–part of the deal has been that the overall tax structure becomes more progressive. That was the case with the Reagan tax cuts of the early 1980s and the Bush tax cuts of the early 2000s. In both cases, upper-income taxpayers wound up paying a larger share of the tax burden. The result is that today, the United States has the most progressive personal tax structure of any developed country. We rely on our upper-income taxpayers to pay the bills more than anyone else.

This pattern is being repeated in the current, wholly-political debate over extending the payroll tax “holiday.” The Democrats, who never let an opportunity for demagoguery go by, want to continue the holiday and make up for it by taxing upper-income taxpayers even more, via a tax surcharge. The Republicans are understandably reluctant to let the Dems pose as tax-cutters, so they have now come up with their own proposal to extend the payroll tax cut:

Senate Republicans would take a page from President Obama’s own fiscal commission and freeze salaries for federal civilian employees for three years. That would amount to a five-year pay freeze in total, given that a two-year policy is already in effect.

The plan would also accelerate the Simpson-Bowles framework for reducing the number of government employees by 10 percent, by only allowing the hiring of one new employee for every three who leave the federal workforce. Simpson-Bowles would have mandated that the government only hire two employees for every three that departed.

Republicans also incorporated means testing for a host of federal programs in their proposal, including for food stamps, unemployment benefits and Medicare.

In all, the GOP plan includes roughly $230 billion in cost savings – enough, Republicans say, to pay for another year of the current 2 percentage point reduction in workers’ payroll taxes and reduce the deficit by $111 billion.

Some say that the most significant aspect of the consensus in favor of extending the payroll tax holiday–which I think is likely to be enacted into law–is that Social Security has been fatally undermined by visibly decoupling contributions from benefits. Quite a few liberals have objected to the payroll tax cut on that ground. They may be right, but I doubt it. Any relationship between taxes and benefits has long since gone by the boards. Federal spending has become an unprincipled money-grab, much like when, in a parade, clowns walk down the street and throw candy into the crowd, and children scramble after it. When a compromise payroll tax bill passes Congress the result inevitably will be that our tax system has gotten a little more progressive. Which is to say, a little more unfair.

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