Already in the presidential campaign we have seen a flat-tax plan from Sen. Rand Paul, R-Ky., and a pro-growth, pro-middle-class plan from Sen. Marco Rubio, R-Fla. Longtime GOP strategist and former White House spokesman Ari Fleischer has a proposal for something we have suggested — payroll tax relief: “I would tell them to create a new Economic Growth Tax Code that does something no one is talking about — abolish all payroll taxes. The new code should also eliminate every loophole and deduction possible, while lowering rates. Three parts to a new tax code. All three aimed at economic growth.”
Getting rid of the payroll tax would relieve a huge percentage of the tax burden on less wealthy workers. The revenue lost from the entitlement plans would need to be made up in a flatter tax code without many deductions.
“Right now, there is a deduction or a credit for almost every activity known to man — paying alimony, foreign taxes and moving expenses, or installing solar panels, to name just a few,” Fleischer wrote Wednesday on . “In addition, there are deductions for housing, charity, health care, education and child raising. Politicians for decades have jammed government spending into the tax code in an effort to look like tax cutters.”
Fleischer is not alone. James Capretta, senior fellow at American Enterprise Institute, wrote earlier this year: “The payroll tax imposes, by a wide margin, the largest federal tax burden on middle-class families. As Social Security and Medicare spending commitments rose over the last half of the last century, the payroll contribution climbed dramatically.”
It is a conservative response, he points out, to liberal proposals that ultimately do not benefit the economy.
“Conservatives oppose raising the minimum wage and other mandates that raise the cost of labor and thus limit opportunities for lower-wage workers,” argued Capretta on . “They should approach the payroll tax in the same frame of mind because the payroll tax raises the cost of labor far more than any of these other federal mandates. An across-the-board payroll-tax cut would be a powerful pro-work, pro-growth policy.” Moreover, the tax relief can be targeted if we “reduce the payroll tax owed by parents with dependent children.”
A payroll tax relief plan could be combined with income tax reform. Fiscal discipline and a less jerry-rigged tax plan are the way to go, but the devil is in the details. How much revenue can we raise through the income tax alone? Do we maintain the progressivity of the current income tax code, or is that achieved through payroll tax relief?
All these issues should be on the table, but I would warn Republicans: They cannot get away with saying blithely that growth or spending cuts will make up the difference. They need to show which spending cuts they would be willing to make. They need to acknowledge that the Reagan tax cuts did NOT pay for themselves. If that means the top marginal rate must have a “3” in front of it or that, unlike the Rubio plan, we need to maintain a tax on capital gains, so be it. If they have to give up the artifice of a balanced budget in 10 years, they should make the case for it. However, Republicans should recall that when Mitt Romney put out a tax plan that was by election standards quite detailed, he got slammed for not explaining all the details.
In sum, thinking beyond the income tax code is certainly wise, but anyone proposing to do so needs to come up with a fiscally responsible plan.
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