Republicans paint themselves into a tax-cut corner

By David Cay Johnston
December 6, 2011

By David Cay Johnston

The opinions expressed are his own.


Slyly encouraged by President Barack Obama, Republicans have painted themselves into a tax corner.

Who would have imagined a year ago, when Republicans rode the Tea Party’s anti-tax wave and retook the House of Representatives, that a year later Republicans would be forced to swallow a huge tax cut sponsored by Obama?

The irony is that Obama’s payroll tax cut could have been taken over by the Republicans as their issue, but they flubbed it.

The payroll tax cut, which bestows the most savings on highly-paid workers, resulted from the refusal by Republicans, after they won control of the House in 2010, to extend the Making Work Pay tax credit.

The Making Work Pay tax credit’s benefits went heavily to the working poor, the disabled, and retirees while in effect in 2009 and 2010.

In September, Obama asked Congress to cut the payroll tax rate even further. Obama wants the 6.2 percent Social Security wage tax slashed in half, saving $1,550 for workers making $50,000. He also wants to cut the employer side of the tax in a way that favors small business.

Republicans quickly rejected the proposals to expand the cut, which is how they started painting themselves into a corner both with workers and with small business owners.

REPUBLICANS AT RISK

With the collapse of the doomed-before-it-began super committee, the Republicans suddenly were at risk that the payroll tax rate would rise automatically in January, allowing the Democrats to portray Republicans as the party of tax hikes for working people and tax cuts for billionaires.

In recent days House Republicans have signaled that they will support extension of the reduced payroll tax rate, but grudgingly. Tea Party House Republicans continue to oppose the payroll tax cut extension so it is not certain the payroll tax cut will be extended, though that would certainly damage the Republican tax-cut brand.

Congressional Republicans, most of whom have signed the no-tax-hike pledge of lobbyist Grover Norquist, have made no secret of wanting tax cuts at the top. Some want to end the corporate income tax and to slash or eliminate taxes on capital gains, dividends, rents, interest and some royalties.

But numerous opinion polls show overwhelming public support for continuing tax cuts for workers and for raising taxes on millionaires. That has left Republican leaders no choice but to silently cry uncle and agree to the president’s request to extend and possibly expand the payroll tax cut.

Having outsmarted Norquist, Obama gets to run for a second term as the champion of at least a $100 billion tax cut. Obama can even say that if Republicans had had their way, working people’s taxes would have gone up while taxes on billionaires would have gone down. And he gets to tell small business owners that, but for Republicans, their taxes would have gone down too.

This is a marketing fiasco for Republicans to rival the Ford Edsel and New Coke. Already more than 40 congressional Republicans have taken steps to distance themselves from Norquist, who scowls at the mere mention of what could have been his, but is now Obama’s, very popular tax cut.

REGRESSIVE FEATURES

The Republicans will have a harder time tarnishing Obama as a progressive because they insisted on killing his Making Work Pay tax credit.

The payroll tax cut that they ultimately accept would have some of the defining features of the 2001 and 2003 Bush tax cuts — almost everyone who paid taxes got a break, but most people got very little while huge savings flowed to the top. Just one in a thousand taxpayers got 12.5 percent of the savings.

In the same vein, Obama’s payroll tax cut benefits everyone who has a job, but most workers get a pittance. The lowest paid 38 million Americans, the one in four workers who earn less than $10,000 a year, will save on average less than $80 each. Only 45 percent of the savings go to 75 percent of workers, those making under $50,000. But the top 4.8 percent get 16.3 percent of the tax savings, my analysis of the plan shows.

Applying the expected 2012 payroll tax rules to the latest wage data, from 2010, two-income professional couples who each make more than $110,100 would save $4,404 next year. That looks to be about two million households.

These high-income couples were denied Obama’s Making Work Pay credit in 2009 and 2010. That tax cut, which polls indicate hardly anyone knew about, was heavily weighted to benefit the lowest income workers. Everyone except the top 3 percent or so got the $400 tax break.

The switch from the Making Work Pay tax break to the reduction in the payroll tax effectively raised taxes on 51 million households, the Tax Policy Center estimated, by an average of $134 each.

Raising taxes on a third of American workers poses a problem for Republicans who want to be known as the party that never raises taxes — but only if voters know what Republicans did.

Norquist tries to explain this away by saying his pledge does not apply to temporary tax cuts. However, Norquist takes the opposite approach when he talks about the Bush tax cuts, which he says were intended to be permanent, even though Republicans did not make them so when they controlled Congress and the White House from 2003 through 2006.

In this and other ways Norquist damages the brand he created, muddying it with inconsistencies and dubious caveats few voters will grasp.

He and his followers are now stuck in the corner into which they thoughtlessly painted themselves — at least until the political paint dries in November of next year.

PHOTO: White House Press Secretary Jay Carney looks at a countdown clock counting the days until the payroll tax cut expires, in the briefing room of the White House in Washington December 5, 2011. REUTERS/Joshua Roberts

6 comments

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I’m all for exposing the brazen hypocrisy of the current Republican Party, but aren’t you also saying that Obama is championing a tax cut that favors the wealthy at the expense of the middle and lower class?

I get that he maneuvered the GOP and Norquist into revealing their true intentions (not concerned with cutting taxes on principle, using ideological rhetoric to obfuscate their objective of shifting the tax burden further off themselves and their rich pals). But if I’m understanding your article correctly, Obama is doing the exact same thing in the process.

Why wouldn’t the Fox News brigade spin this as “Obama tax cut would raise taxes on 1/3 of American workers” or “Under Obama tax cut, top 5% would get 16% of the savings”? Trying to out-hypocrite the most pathologically hypocritical party in history seems doomed to fail… but even if it IS a brilliant political play, why the hell should I care when it means I’m paying MORE taxes than last year?

Posted by spameroo | Report as abusive

I think you’re playing games with numbers to make Obama’s plan sound regressive when it’s really not.

Payroll taxes are the only Federal tax paid by the lowest income workers, so cutting 2 percentage points out of 7.5 is close to a 30% reduction in their taxes. For my wife and I, that number is closer to 10%. For someone with a seven figured income who only pays social security taxes on the first $106K, that percentage becomes much smaller.

See, I can play, too. :)

Posted by bruce1963 | Report as abusive

A decrease in the social security tax does not favor the uber-wealthy, as the social security payroll tax is only levied on the first 107k of annual income. The reason those at the higher end of the middle to upper middle class spectrum are receiving a higher percentage of the savings, is that as the tax is flat up to the cutoff they pay in a higher portion of the tax. Versus the Making Work pay was a flat credit, which would be worth more to those with lower income, i.e. $400 if you make 10,000 or 100,000.

If this isn’t a sign to even the upper middle class American’s that the Republicans only care about tax breaks for the uber-wealthy, I don’t know what will. Consulting IRS data for 2009 the number of single returns with income under 100k accounts for 95% of single returns.

Posted by AnastasiaG | Report as abusive

The sad part? Obama is playing with Social Security, pushing the program more and more into the general budget where it will be subject to all the worst kinds of political jockeying it should be (and mostly is, and has been for decades) sheltered from. It’s beyond cynical. It’s evil to play with a program that millions of poor Americans rely on and which they paid into for all their working lives.

Even more obnoxious is that “fixing” Social Security would be very easy, and you might even permanently cut the payroll tax. How? Apply the Social Security tax to all income, regardless of source. And make businesses that hire contractors also pay whatever share they pay employees. Social Security would be truly independent, could pay out at a higher rate (more like 70% to 80% of average lifetime income), and might even eliminate the need for private company or government sponsored pension plans (unless people want to save on their own, which always is a good thing).

In short, this is the worst sort of politics and should be roundly condemned. Not praised.

Posted by FredFlintstone | Report as abusive

15 Trillion USD in the hole and everybody wants a tax cut. We have to stop digging the hole deeper and somebody has to start filling it back in.

Posted by breezinthru | Report as abusive

@FredFlintstone – you make a very insightful point. This is a risky trade-off for Obama that might come back to bite us. I have to ask myself, though, ‘what’s the alternative?’. Unfortunately, he has to strike while the iron is hot. I can guarantee the Reps. won’t be better stewards of SS. A dirty trick?…perhaps, but a pragmatic one.

Posted by gnostic8 | Report as abusive