Higher taxes on the “rich” have dominated discussion of the McConnell-Biden deal, but it has also been widely reported that the legislation will raise taxes on more than 77% of all U.S. households. In fact, the Tax Policy Center has calculated that 46% of the additional taxes raised in 2013 will come from the bottom 80% of Americans. So why haven’t we been hearing more about this?
The tax that will hit most households is a 2% increase in the Social Security payroll tax. That increase results from the fact that the 2% payroll tax holiday, which had been extended through 2012, has quietly been allowed to expire as part of the fiscal cliff deal. Why are Republicans not trumpeting the fact that, far from merely increasing taxes on the wealthy, the Obama administration has forced an agreement that raises taxes on almost all working Americans? Presumably the Republicans see no advantage in talking about that part of the agreement, as it was perhaps the only part of the deal that was actually desired by both parties.
The Democrats’ decision to let the payroll tax holiday expire is actually very interesting. A debate has raged over this issue on the left. Some liberals have argued that the holiday should be extended indefinitely, as a pay raise for working Americans. But other liberals–the more perceptive ones, I think–recognized a long-term danger if the holiday was allowed to become permanent. Social Security has always been promoted as a universal old age security program, not a redistribution scheme, and certainly not a welfare program. The idea that workers earn their Social Security benefits by paying into the system is deeply engrained in our political discourse, even though the reality has become quite different, as benefits have dwarfed contributions and the program has taken on some redistributionist aspects.
Social Security is now running in the red, I believe, but it is still relatively solvent compared to Medicare and Medicaid. The more perceptive liberals argued that the payroll tax holiday was dangerous because it would make obvious the fact that today’s employees are not paying anywhere near enough to “earn” the benefits they are projected to receive. If the founding myth of Social Security was thus undermined, in time public support for the program would erode. Fiscal realities would make the program’s universal nature unsustainable, and inevitably benefits would be means tested. At that point, Social Security would be seen as just another welfare program, and we all know how popular they are. Liberals see Social Security as the centerpiece of their communitarian vision of America; they rightly saw patently inadequate payroll taxes as a threat to that communitarian vision.
Which is why nearly half of the tax increases in the Biden-McConnell compromise won’t be coming from high income earners, and why neither party wants to talk about that fact.