Read their lips, carefully

Bill Drayton chairs the board of Get America Working!, a nonpartisan full-employment policy group.

In 1988, GOP presidential nominee George H.W. Bush uttered the iconic sound bite, “Read my lips, no new taxes.” He ate those words two years later, then endured the backlash in 1992. That should have been a clue that “no new taxes” was too simplistic to fit the actual case of our fiscal needs.

Twenty years later, it’s even harder to pretend that the sound bite fits. As the primaries begin, the first crop of baby boomers (born in 1946) are about to qualify for early Social Security benefits (Jan. 1, 2008). Projected Social Security and Medicare shortfalls, soaring government spending, huge deficits and recession worries all suggest that revenues will contract and budgets tighten to the point at which further tax cuts would make matters worse. On the other hand, slow or negative growth would require a stimulus package, and tax increases would have the opposite effect.

So should candidates be promising to cut taxes or raise them? The answer is, it depends -- maybe both. What they should be delivering is a more nuanced debate on tax policy, especially regarding Social Security funding, rather than just trying to tar their opponents with the “new taxes” brush.

Here’s why:

Federal payroll taxes, the biggest tax that 80% of Americans pay, are notoriously regressive. They include those collected for unemployment, health and Social Security, and they generate about as much revenue as federal income tax, yet the rich pay very little in the way of payroll taxes -- annual income above $102,000 is exempt. Barack Obama, John Edwards and Christopher Dodd favor raising the caps on Social Security payroll tax, probably with a “doughnut hole” exempting higher middle-class incomes above $102,000 but kicking in again somewhere above $200,000.

Some call this a new tax or a tax increase, but it would only apply to the wealthy, and Obama also proposes a tax credit to decrease the payroll tax burden on lower-income families. So does billionaire Warren Buffett. Buffett recently said that his own taxes were too low and reminded the Senate Finance Committee that there are 23 million American households earning $20,000 a year or less that pay up to 15.3% of it in payroll taxes and need relief.


Beyond tax equity, the big reason to reduce the payroll tax burden, particularly for low-income workers, is to create jobs -- an argument for cutting payroll taxes. They artificially increase the cost of hiring and depress job growth, yet payroll tax revenues and rates have grown from 1% of federal revenue and a 2% rate in 1935 to about 40% of federal revenue and 15.3% today. Raising payroll tax caps further only deepens our dependence on those job-killing revenues. Hillary Clinton, Bill Richardson, Rudy Giuliani, Mitt Romney and Fred Thompson oppose raising the caps.

It’s true that not raising payroll taxes would avoid further depressing job growth, but it wouldn’t actively stimulate it. Yet stimulating it is urgent.

Officially, the Bureau of Labor Statistics says that with 4.7% unemployment, about 7.2 million Americans aren’t working. Unofficially, the number of chronically unemployed and underemployed groups who want a job -- discouraged workers, women, minorities, seniors, people with disabilities, legal immigrants -- is at least 70 million. Imagine the loss to the economy and the tax base, and the staggering costs of the resulting government dependency and social ills, from depression to crime.

Now imagine the effect of a two-thirds cut in payroll taxes, boosting employment 13% in the long term. Moreover, if the lost tax revenue is made up with increased taxes on energy and natural resources (and therefore on products created from them), their costs relative to hiring people will rise, which roughly doubles the jobs created. For example, if your clock radio breaks and the cost of hiring a repairman is lower than the cost of replacing it, more repairmen would have work.

France, Germany and many other countries are cutting payroll taxes to boost employment; we can too. Ron Paul, for example, would reduce the Social Security payroll taxes that seniors pay. Mike Huckabee would eliminate payroll taxes as the funding mechanism for Social Security in favor of private savings accounts and a new sales tax. San Francisco Mayor Gavin Newsom just proposed cutting businesses’ payroll taxes to boost employment, coupled with a new commercial energy tax to provide an incentive to conserve energy and lower carbon emissions.

That particular kind of new-tax talk is apparently no longer the anathema it was in 1988. In fact, the list of those proposing some form of new taxes on consumption, pollution or energy, offset by payroll tax cuts, includes the AFL-CIO, Al Gore, T. Boone Pickens, Bill Bradley and columnists from Charles Krauthammer to Thomas Friedman. In uncertain economic times, “no new taxes” has to yield to a more nuanced message from candidates’ lips: Cut truly destructive taxes, but balance them with new and better sources of revenue.