Why the payroll tax fight matters

Congress has a long to-do list to complete before the end of the year.

It must enact a budget, either a real one, or for most federal agencies, a Continuing Resolution that funds the government after the current one expires on Dec. 16. Many ask: “Why doesn’t Congress just pass the budget?” Because neither the Democrats nor the Republicans have enough votes to say yes, but they do have enough votes to reject the alternative.

Still, Congress must pass a new round of payroll tax cuts and extend unemployment benefits or both of those programs will expire at the end of the year.

Currently Republicans are adding all sorts of amendments that have little to do with either a budget or a tax cut. The House bill on the payroll tax, for example, requires a 60-deadline for permitting the Keystone XL Pipeline to pipe oil  from Northern Alberta across Montana, South Dakota and other states in the midwest. There is significant opposition to the pipeline construction from Indian Country. The National Congress of American Indians in June said:“The Keystone XL pipeline . . . would threaten, among other things, water aquifers, water ways, cultural sites, agricultural lands, animal life, public drinking water sources and other resources vital to the peoples of the region in which the pipeline is proposed to be constructed.”

The payroll tax debate is critically important to poor people and to individual American Indians. The current tax is 4.2 percent of earnings (up to a cap of $106,800). If nothing is done by the end of the year that tax will increase to 6.2 percent (plus, remember, Medicare is a tax on top of that).

What do those numbers mean? Arloc Sherman, a senior researcher at the Center on Budget and Policy Priorities, says the lower payroll tax will keep roughly 1.1 million people out of poverty. And, in Indian Country, it’s a big deal. Based on the median income of $21,750 for a family living on a reservation, the payroll tax cut represents about a $1,000 difference -- so if no bill is enacted, that tax increase will cost folks $435 out of pocket.

One Republican plan would pay for payroll tax reductions by freezing the salaries of federal workers for the next two years, according to the Washington Post. One union leader calls this a new tax on federal employment. Another Republican plan would pay for the payroll cuts with even deeper program spending cuts.

This is a strange fight about what kind of taxes we pay, payroll versus income. Every worker pays the payroll tax, but not every American pays an income tax. But what’s often missing from that last sentence is the “why.” The income tax doesn’t apply to those who don’t earn enough. “It’s wrong to rail on the 46 percent of people who don't pay income tax,” Paul Caron, a tax professor at the University of Cincinnati College of Law, told the Business Insider.  “A fairer analysis takes into account all taxes paid—and by this measure, everyone has tax skin in the game.”

If you look at all taxes paid, not just the sainted income tax, then all sorts of questions pop up. Such as: Why is investment income treated more generously than money we earn by the hour? Or, in an economy that needs entrepreneurs, why do we double-tax the self-employed? Or best of all: Why do some corporations get away without paying their fair share?

A lower payroll tax immediately benefits the economy.A paper by Bobby Dexter from the Chapman University School of Law puts it this way: “The average plumber earns $50,360.95 If the payroll tax cut is not extended, his taxes will rise by $1,007; for nurses (with average salary being $67,720), that increase is $1,354.96.”

If a nurse has to come up with an additional $1,354.96 next year then that’s money that won’t be spent in the general economy -- shrinking stores’ sales, people’s jobs and general economic opportunity.