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Should The U.S. Lift The Payroll Tax?

By Marc Tracy

We've offhandedly mentioned (see the bottom of this post) one of the National Federation of Independent Business's more heterodox and intriguing ideas: a payroll tax holiday as a stimulus measure. In one place, the group--which is probably the most prominent small-business lobby, and one that generally leans to the right--argues, "The payroll tax holiday would be a big boost to America's job creators and reduces the cost of labor." That's almost by definition correct: the payroll tax is (as its name suggests) a tax levied solely on those with jobs; eliminating it would make it cheaper to hold a job, and therefore cheaper to hire people. On top of that, eliminating the payroll tax reduces the burden of paperwork on the businesses themselves--in fact, it is the associated logistical nightmares associated with taxes rather than the taxes themselves that, according to a recent article at our sister site The Big Money, causes the biggest headaches for small businesses.

What's so interesting about the proposal, coming from the NFIB, is that the payroll tax--which ostensibly is dedicated to funding Social Security and other entitlements (though in reality all federal tax revenue goes to the same place)--is the most prominent regressive tax: it kicks in on the first dollars you make from a job, but phases out once you reach six-figure territory, and therefore falls on the poor heavier than on the rich, percentage-wise (as opposed to the income tax, which is progressive--it falls heavier the more you take in). For a conservative group to advocate the lowering or lifting of the tax that is, of all of them, the one that is already doing the least damage to the pocketbooks of the wealthiest is unusual. It suggests they may truly be on to something.

On the flipside, cutting taxes of any kind is not what you typically find proposed by a left-leaning political commentator. But there in this week's The New Yorker is prominent liberal Hendrik Hertzberg proposing--yes--the elimination of the payroll tax. What's that line about strange bedfellows again?

To be sure, Hertzberg and the NFIB aren't on the exact same page. The NFIB wants a temporary holiday on the tax as stimulus; Hertzberg wants an elimination of the tax that is offset, revenue-wise, with new or increased taxes on activities that he believes the federal government has a legitimate interest in discouraging--pollution and carbon emission, for example.

But the broad point is the same: the payroll tax is--literally!--a tax on work. And just about the last thing the government should be doing, particularly during a recession where unemployment is rising, is discouraging working and hiring.

Think of it this way. When Obama attempted to sell his new measures aimed specifically at helping small businesses yesterday, he sold them under the logic that small businesses are crucial to the larger economy precisely in their capacity as job-creators: they are responsible, he asserted, "for half of all private sector jobs and...roughly 70 percent of all new jobs in the past decade." Well, Mr. President, how would you like to help small businesses create jobs for the economy, and help small businesses and less-well-off workers in the process? We think we have an idea for you.

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