|Cato Policy Analysis No. 129||March 8, 1990|
by Daniel J. Mitchell
Daniel J. Mitchell is a Washington economist.
Sen. Daniel Patrick Moynihan (D-N.Y.) has dropped a bomb into the fiscal debate with his recent proposal to reduce Social Security payroll taxes. The immediate support he has received from individuals and groups representing all shades of the political spectrum is well deserved testimony to the merit of his idea. Social Security taxes have skyrocketed in recent years. Tax increases signed into law by former presidents Jimmy Carter and Ronald Reagan raised the total combined employee/employer payroll tax rate by more than 30 percent, from 11.70 percent in 1977 to 15.30 percent today. Moynihan's legislation would immediately repeal the 0.28 percent tax rate increase that went into effect January 1, 1990, and reduce it further, to 13.10 percent, on January 1, 1991.
Sens. Robert W. Kasten, Jr. (R-Wis.) and Steven D. Symms (R-Idaho) have also introduced separate pieces of legislation that would provide payroll tax relief to working Americans. While the publicity is new, cutting payroll taxes is an idea that has been discussed for several years. Peter Ferrara, one of the nation's foremost experts on Social Security, urged a payroll tax reduction in An American Vision, published in January 1989. The Heritage Foundation has also been in favor of lowering the payroll tax for quite some time.
Opponents of lower payroll taxes have branded the idea as irresponsible. They assert that discussing tax cuts while the government is still running yearly deficits is wrong. Furthermore, they argue that a large tax cut would wreak havoc with the Balanced Budget and Emergency Deficit Reduction Act of 1985 (commonly known as Gramm-Rudman) and undermine the only legislation that has had a positive impact on controlling federal spending. Critics also attack the idea of returning to a "pay-as-you-go" basis for Social Security. To them, the main reason for the large tax increases contained in the 1983 Social Security Reform Amendments was to build a reserve in the Social Security Trust Fund that could be used to pay benefits when the baby- boom generation retires early next century. They may agree that high payroll taxes are a burden on the economy, but they believe a payroll tax cut would inevitably result in a reduction in Social Security benefits. Others worry that cutting Social Security taxes this year would simply set the stage for economically destructive tax increases next year.
Although some of those concerns are legitimate, the tangible benefits of lower payroll taxes strongly outweigh the potential drawbacks of the proposal.
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