Friday, December 9, 2011
To Protect Rights, Phase Out Payroll Tax Completely
President Obama correctly says that cutting the payroll tax is “the right thing to do.” Unfortunately, Obama along with his supporters in Congress want to cut the tax in the wrong way, for the wrong reasons, and by the wrong amount.
The wrong way to cut the tax is to offset it by raising other taxes. At one point, Obama suggested covering the tax cut by increasing deficit spending, which imposes future taxes. Congressional Democrats want to cut the payroll tax but increase taxes on wealthier citizens. One Republican calls for raising taxes on corporations.
Yet individuals have the right to use their own money as they judge best. Forced wealth transfers violate that right. By the standard of individual rights, the proper aim is to reduce the total amount of force, not shuffle the victims of wealth transfer schemes.
Somewhat better is to accompany the modest proposed tax cut with cuts in government spending. USA Today reports that most Republicans support cutting the payroll tax in principle but want “to pay for it with offsetting budget cuts.” One Republican proposal, reports Bloomberg, called for freezing “the pay of federal civilian workers and shrinking the federal workforce by 10 percent through attrition.” That measure failed, Fox News reports, but a new proposal calls for cutting funds for federal retirees (as well as raising “premium fees on the wealthy for Part B Medicare”).
However, if government spending is wasteful or otherwise inappropriate, then it should be cut regardless of what happens to the payroll tax—a point particularly germane given that the U.S. debt has surpassed $15 trillion.
Ideally, cuts in the payroll tax should be linked to cuts in spending for the program the tax supports: Social Security. Unfortunately, Social Security’s expenses already outstrip the funds raised by its dedicated payroll tax; last year the program went “cash negative,” a problem projected to grow much worse with time.
Obama and his supporters not only want to cut the payroll tax in the wrong way, they also want to cut it for the wrong reason: to “stimulate” the economy by promoting consumer spending. Obama wants to cut the payroll tax, even if that increases deficit spending, because “Now’s the time to step on the gas,” he said. (The AP adds that Obama also wants to expand unemployment payments; obviously his concern is not reigning in government spending.)
However, if the federal government artificially promotes consumer spending while spending the same amount of the citizens’ wealth, the result is merely to sacrifice long-term prosperity to short-term binge consumption. That’s why the various “stimulus” packages under Obama and George W. Bush have done nothing but violate individuals’ rights and undermine their economic decisions. Individuals prosper best when government protects their economic liberty, and individuals suffer when politicians attempt to “stimulate” them by the use of government force.
Unfortunately, Congress is suggesting merely a modest, short-term cut in the payroll tax. The IRS reports that, for 2011, the employee tax rate for Social Security is 4.2 percent, down from the standard 6.2 percent. (Employers must pay 6.2 percent as well.) Democrats proposed to temporarily cut the employee tax to 3.1 percent (though different plans have offered different numbers).
What is the right amount to cut the payroll tax that funds Social Security? The answer according to the principle of individual rights is to phase it out completely. This could be done over time while slowly reducing the costs of the Social Security program to zero. One way to accomplish this is to gradually increase the pay-out age for new retirees (while maintaining benefits for current retirees) by a few months each year, without interruption. The payroll tax could be lowered to match the decreased costs. After a period of years, the program would be phased out completely and the tax eliminated.
With the payroll tax for Social Security gone, individuals could once again take responsibility for spending their own wages, financing their own retirements, and, if they wished, voluntarily contributing to the retirements of others. The fact that such a proposal is considered “politically infeasible” today, and indeed is not even mentioned by any member of Congress or any news reporter, indicates that today’s politicians and their sycophants have little or no respect for individual rights.
Image of President Barack Obama: Wikipedia Commons
Image of Social Security: Wikipedia Commons
Posted in: Taxation
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