The big buzz words in the recent election were “middle class.” Every pol in both political parties claimed to be fighting to save or protect the middle class. None were more emphatic about claiming to be a friend of the middle class, its protector, than Barack Obama.

The election ended and we had a big debate about taxes. Mr. Obama, playing his usual fade and cave role, backed off from a years-long pledge to let Bush-era tax rates for the top two percent rise to Clinton-era levels, fading and caving to a $400,000-$450,000 level, a huge win for the rich. In return, the Republicans allowed Bush-era lower income tax rates for the middle class — those making less than $200,000, or $250,00 in family income — to stay in place, something they were willing to do before the negotiations started.

That’s how Mr. Obama (and go-along Democrats) protected the middle class on taxes. He didn’t fight, however, and certainly the Republicans didn’t fight, to keep the Payroll Tax rate at 4.2 percent. It rose back up to 6.2 percent.

Since three-quarters of American working people (a.k.a. the middle class) pay more in this tax than in income taxes, the net result of saving the middle class on income tax hikes while not protecting it on Payroll Tax (a.k.a. Social Security Tax) hikes is that taxes have gone up for almost all middle class taxpayers by virtue of this tax deal.

Here’s another way to look at this so-called “compromise.” If Bush-era tax cuts for all taxpayers had simply been allowed to expire, while the Payroll Tax rate had been kept at 4.2 percent, the middle class would have been better off on a net basis.

Ah, but you may have heard that this lower Payroll Tax rate might soon be reconsidered by Congress and the President down the road. Will this, if it happens, end up benefiting the middle class?

If you think that you don’t understand today’s Washington. A place where no matter who gets elected on whatever platform, the rich are aided and protected and the middle class is screwed. (The poor, or course, are no longer even considered. Their disenfranchisement and abuse is taken for granted.)

In return for lower Payroll Tax rates, Republicans would certainly demand, and likely get from a fade and cave president, middle class stiffing cuts in entitlement programs. Or Republicans would demand so-called “reform” of the Social Security. This might include a higher retirement age to collect Social Security, or reduced benefits, or a new way to compute annual COLA adjustments that would cut future benefits indirectly. Any of these would naturally hurt the middle class but not touch the rich at all, because the Payroll Tax is now collected only on incomes of $113,000 a year of less.

There are, of course, other ways to “reform” Social Security. The tax could be collected on all incomes, for example, even income from dividends and capital gains. And were this done, the Payroll Tax could be less than 4.2 percent on individuals, and perhaps lower on the Payroll Tax share paid by business as well, a huge incentive to boost hiring.

Such a real reform is not even under consideration in present-day Washington. Not with a big buck bought Republican Party, and a Democratic Party whose members that are not totally brain dead on issues are nonetheless prevented from being real middle class defenders by a need to support their party’s current fade and cave head.

One of these days, from the still breathing segment of the Democratic Party, or a new Working Americans Party, true middle class defenders will arise again. Let’s hope it starts happening as soon as the 2014 elections. Because, dear friends, it ain’t gonna happen any time before that.

(My two most recent novels, Fifteen Feet Beneath Manhattan and The Bellman’s Revenge, are available on Amazon.)

MICHAEL SILVERSTEIN, Wall Street Columnist
Sort by:   newest | oldest
zephyr
Guest
zephyr
3 years 8 months ago

Who really advocates for the middle class and the working poor? Nobody that I can see. (sorry, lip service doesn’t count).

slamfu
Guest
slamfu
3 years 8 months ago
Well the fact is that the payroll tax isn’t without a goal. It pays for something that all people are definitely going to need, and the 6.2 rate is where it should be. That was a temporary relief and was going back up to that rate at some time anyways. I don’t think its the royal screwing some are making it out to be. I’m more disappointed that the new top tier bracket was created instead of keeping it to $200/250k. That basically cut by around 1/3rd the new revenue coming in and I doubt that the money is going… Read more »
sheknows
Guest
sheknows
3 years 8 months ago
It would be much smarter to remove the cap on payroll taxes so everyone has to pay equally. They need to restore the contributions by the wealthy to their historic levels. That would close the Social Security funding gap in an equitable manner rather than making cuts. Hey, if those making over $113k don’t need to pay into it, then they don’t need to collect it when they retire I guess. I realize getting the Republicans to understand that this is the fair and reasonable solution is like battling with the devils of Hell, but preferable to lowering the PRT… Read more »
sheknows
Guest
sheknows
3 years 8 months ago

The cap on payroll tax should be eliminated. Everyone should pay into SS equally. By restoring contributions by the wealthy to their historic levels, it would close the SS funding gap.
Lowering the PRT on the middle/lower class again would only be another trigger for the Republicans to exact their pound of flesh since those classes were “favored” due to our crummy economy.

Heard a joke the other day, which is not so funny. ” Many Republicans don’t hate minorities……but they ALL hate the poor.”

zusa1
Guest
zusa1
3 years 8 months ago
“It pays for something that all people are definitely going to need” How is this different than what income tax is used for? Should people only pay for what they themselves will need? “Many Republicans don’t hate minorities……but they all hate the poor.” They hate policies that keep the poor poor. “I am for doing good to the poor, but…I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. I observed…that the more public provisions were made for the poor, the less they provided… Read more »
sheknows
Guest
sheknows
3 years 8 months ago

Republicans hardly hate policies that keep the poor poor. Too many examples to note in policies over the years, but suffice it to say that in THIS instance, there is just no excuse. NO excuse not to have payroll taxes for all income levels. None whatsoever.
If all brackets benefit from SS, then all should have to pay into it. The policy that keeps them from doing so now was a Republican one to protect the wealthy.

zusa1
Guest
zusa1
3 years 8 months ago

They pay payroll tax on their income up to 113K. This is also the income used for benefit calculation.

Regarding the poor, the Rep’s tend to have a philosophy that depriving a government agency of money will drive efficiency. It takes more than that. The article I posted above from NY times is very good. This is good too.
http://www.nytimes.com/2011/06/08/business/economy/08leonhardt.html?_r=0

ShannonLeee
Guest
ShannonLeee
3 years 8 months ago

Churches aren’t charities. They are more like SuperPacs.

sheknows
Guest
sheknows
3 years 8 months ago
Good article thanks Zusai. Germany also has a much sounder approach to unemployment than we have. The big and I mean BIG difference between us and them is that their government wasn’t imbalanced so drastically to begin with with as ours was. They also didn’t and don’t devise laws and loopholes to protect the wealthy as does ours. We just started on a track that never ended, where the wealthy just kept pulling ahead of the middle class, farther and farther. Consequently, they became ( become) more and more powerful. They buy our politicians and dictate our laws and regulations…and… Read more »
sheknows
Guest
sheknows
3 years 8 months ago

Just to clarify one point. The way it is now, people who earn say $50k a year have to pay 6.2% on all their income. People who earn $226K a year pay 6.2% on only HALF of their income. Makes a pretty big difference at the grocery store.

tidbits
Guest
3 years 8 months ago

“Makes a pretty big difference at the grocery store.”

I get your point, sheknows. On the other hand somebody’s got to have enough after tax income to be able to afford to shop at Whole Foods.

sheknows
Guest
sheknows
3 years 8 months ago

LOL…True…or as I call it Whole Paycheck Foods.

zusa1
Guest
zusa1
3 years 8 months ago

The person taxed at 6.2% on 50K, gets 50K credit in benefit calculation.
Would the person taxed at 6.2% of 226K get 226K credit or 113k in their benefit calculation? Because the answer is 113k, the extra 7k the 226k earner would pay would be forfeited to the system.

I’m not necessarily against progressive taxation of social security (I think it is preferable to means testing which could discourage personal saving), but we need to look at both payments into and out of the program when discussing fair.

SteveinCH
Guest
SteveinCH
3 years 8 months ago
No offense, but this statement is simply incorrect. Here’s another way to look at this so-called “compromise.” If Bush-era tax cuts for all taxpayers had simply been allowed to expire, while the Payroll Tax rate had been kept at 4.2 percent, the middle class would have been better off on a net basis. Let’s say you are a middle class taxpayer with an AGI of $50,000. The change in the payroll tax cut costs you $1,000. The change in the tax rates would have cost you far more. Under the tax rates that pertained under Clinton, you’d pay $8,300 in… Read more »
SteveinCH
Guest
SteveinCH
3 years 8 months ago

Zusai,

Just FYI, the benefit calculation of SS is highly progressive and highly generationally unfair to the young.

See exhibit 15 in the attached.

http://www.cbo.gov/sites/default/files/cbofiles/attachments/43648-SocialSecurity.pdf

zusa1
Guest
zusa1
3 years 8 months ago

Thanks Steve. I knew I was probably being overly simplistic.

sheknows
Guest
sheknows
3 years 8 months ago

What do you mean” benefit calculation?” You are saying that the current system is fair, and that there really IS no payroll tax cap in existence, and Dem congress has been trying to change that non-existent inequity for years because …why?
BTW, means testing wouldn’t discourage personal saving one bit. In fact, it would encourage it since why WOULD the wealthy want a “Government handout”?

SteveinCH
Guest
SteveinCH
3 years 8 months ago
Sheknows, I’d suggest reading the CBO report. Benefits are calculated on the basis of lifetime contributions. One of the reasons raising the cap is a poor approach to solving the funding issues is that benefit payouts would go up at the same time so you wouldn’t save as much money as you think you would. To quote two conclusions from the report However, for people born in the 1940s or later who have household earnings in the second quintile or above, the present value of taxes will be, on average, more than the present value of scheduled benefits. Also, taxes… Read more »
zusa1
Guest
zusa1
3 years 8 months ago

It’s not the wealthy that would be a problem, it is the people on the margin. I don’t want a system where people have a goal of not having too much income at retirement so that they qualify for social security. Perhaps in the beginning the threshold would be set sufficiently high, but as are currently seeing, the definition of rich is highly subjective.

SteveinCH
Guest
SteveinCH
3 years 8 months ago

Zusai,

For what it’s worth, I think the means test should be on wealth and not income. The way I would do it is to ask people with above a certain level of wealth to pay back SS and Medicare benefits out of their estates before passing any on to their heirs.

Net, net, benefits provided to you by the government should be returned to the government before you pass anything on.

zusa1
Guest
zusa1
3 years 8 months ago

“The way I would do it is to ask people with above a certain level of wealth to pay back SS and Medicare benefits out of their estates before passing any on to their heirs.”
I really like this approach.

As an aside, I also think we should consider a bump in estate tax to cover the under payment of taxes that occurred during the person’s lifetime, specifically designated (if that’s possible :) ) to go towards the debt.

ShannonLeee
Guest
ShannonLeee
3 years 8 months ago

Not to hijack, but Germany’s approach to unemployment isn’t all that great. No minimum wage and €400 jobs that subsidize slave labor isn’t a good answer. Germany is in dire need of setting limits on how companies use tax payer dollars to avoid having to hire full time employees.

petew
Guest
petew
3 years 8 months ago

Just a question,

I have heard a lot of comments concerning how raising taxes only on those families earning more than $450,000 + per year, and individuals at $400,000 + has effectively negated any of Obama’s hopes to raise taxes (meaningfully)on the wealthy. Can someone tell me how much less will be collected in income taxes by using the final compromise income level, than the original $250,000 and above level? It seems to me that there will still be plenty of taxpayers who earn much more than $450,000. Does anybody have the exact figures?

sheknows
Guest
sheknows
3 years 8 months ago
Just a side note by Boston University Economist Larry Kotlikoff. ” removing the cap entirely, and imposing a flat tax of 12.4% ( 6.2% on each side) on ALL earnings, essentially 100B a year tax increase on the wealthy, would more than completely close the funding gap”. Another economist, Mulrey submitted her report to the Congressional Research Service in 2010. She had another angle and stated “If all earnings were subject to the payroll tax, but the base would remain for benefit calculations, we could remain solvent for 75 years.” Since the taxable earning base rate has risen at the… Read more »
sheknows
Guest
sheknows
3 years 8 months ago

The amount I read was that by going to 450K instead of 250k it saved appx 200B for the wealthy. The first was projected to bring in 800k, now it only brings in 600k. But that was just the tax portion. We haven’t gotten to the deduction/loophole portion yet.

sheknows
Guest
sheknows
3 years 8 months ago

correction 800B and brings in 600B.

SteveinCH
Guest
SteveinCH
3 years 8 months ago

But for the base to remain while the tax goes up requires changing the benefit calculation. If you’re willing to do that, just cut benefits to the wealthy instead or means test.

And of course human history extends beyond the last four years. Try figure 1 of the attached.

http://aging.senate.gov/crs/ss9.pdf

You’ll see that the wage base covered by SS is well within the historical average.

A little history can be helpful.

sheknows
Guest
sheknows
3 years 8 months ago
Only if means testing begins with a realistic income. My inlaws parents were so wealthy that they didn’t even know when a SS check came let alone cash any. They would need to figure out how much of a difference certain income levels would have on shoring up the program. Is $500k enough? what about medical emergencies, retirement communities..suppose they need more than $500k for a projected retirement over x amt of time? It would go on forever and be impossible to assess in lieu of unforeseen events. Much simpler to tax across the board and be done with it.
SteveinCH
Guest
SteveinCH
3 years 8 months ago

Much simpler to take money from people who make it and give it to people who don’t need it. Gotta love simplicity.

sheknows
Guest
sheknows
3 years 8 months ago

Shannon, it was my understanding that when companies face a financial crunch, rather than firing employees and putting them all on total unemployment, they cut back their hours to part time and the state pays the difference to them.( the individuals, not the company) Then, when the company is reviewed on a periodic basis for improvement, they start hiring back full time. No?

sheknows
Guest
sheknows
3 years 8 months ago

LOL, No much simpler to take money equally from all people and give it people who probably WILL need it. Don’t forget, we have generations coming up that don’t near anyway total the # of baby boomers who contributed this time round .

dduck
Guest
dduck
3 years 8 months ago

Willie Sutton said it all: I rob banks (substitute middle class) because that’s where the money is.

ShannonLeee
Guest
ShannonLeee
3 years 8 months ago
Sheknows, I’ve never heard of that, but it is a complex system so it might be happening too. What a lot of companies do is to hire people part time for 400 euros a month. The people continue to receive all of their unemployment benefits, but must work part time. It sounds great, but what is happening is that the government is outsourcing this to temp agencies that abuse their employees. Other companies hire these temps, batches of them, to do full time jobs. So,the system that wants the unemployed to work for their benefits is effectively take many full… Read more »
SteveinCH
Guest
SteveinCH
3 years 8 months ago
No offense Michael but you seem to be misinformed on this topic. First off, let’s look at the change in tax rates incurred by this deal between the rich and the middle class. Effective tax rates on the top 1% rose by about 7 percentage points versus about 2% on everyone else. See this piece from Jordan Weissmann, no conservative he. Second, you are ignoring the historical context. If you’d like to see tax rates across groups, this from the TPC is a good place to start (it is data from the CBO). If you look at the data, you’ll… Read more »
The_Ohioan
Guest
The_Ohioan
3 years 8 months ago
I’m probably, undoubtedly, missing something. Here is what the increase in taxes would be if the Bush tax cuts expired. http://www.npr.org/2012/07/10/156493984/bush-tax-cuts-the-new-middle-class-norm In every case the payroll tax increases are less than the expiring Bush tax cuts would have been. Income Bush tax cuts expire Payroll tax increase $16,000 $512 $320 $33,000 $1,281 $660 $60,000 $1,843 $1,200 $100000 $3,424 $2,000 Had this deal not been made, the Bush tax cuts would expire and workers would be paying more in taxes than they now are with PRTax increases. And those increases in PRTaxes would have to kick in sometime (then being added… Read more »
The_Ohioan
Guest
The_Ohioan
3 years 8 months ago
The very wealthy are only 1-2% of the population. Even if their benefits were raised according to their contributions, they are too few to skew the contribution/benefit in any meaningful way. No need to means test. Anyone who has over a certain income pays taxes on their SS benefits already. Ask any double or triple dipper how much they actually net from their SS benefits. Considering SSI benefits for the disabled and spousal benefits only muddies the basic calculations of what most people pay vs what most wealthy people pay – and receive (if they live that long). One could… Read more »
dduck
Guest
dduck
3 years 8 months ago

What Ohio said.

SteveK
Guest
SteveK
3 years 8 months ago

Michael Silverstein said: Haven’t you noticed that American middle class life in recent years has been getting more and more difficult? Haven’t you noticed that the richest among us are getting richer while the rest of us aren’t? Haven’t you noticed that our government seems to express more and more the wishes of the richest and isn’t doing things that most Americans — through the ballot box — say they want.

Bingo Michael!

I believe that everybody sees this… It’s just that some don’t seem to care.

SteveinCH
Guest
SteveinCH
3 years 8 months ago
Hi Michael, Of course, we all believe what we want to believe. When people state things as conclusions, it’s generally helpful if there are facts to back those conclusions up. It’s not that I disagree with your observations but assigning causality requires more than an observation. There are a lot of people who have a closed loop process of inquiry into the world…where facts and observations that disagree with beliefs are discarded or discredited, not through the presentation of alternative facts but simply because they don’t agree with the hypothesis. That approach to the world seems a very dangerous approach… Read more »
SteveinCH
Guest
SteveinCH
3 years 8 months ago

duck and Ohio

I really would encourage you both to go read the CBO report I cited upthread. It takes into account the objections you raise and still reaches the same conclusions.

SteveK
Guest
SteveK
3 years 8 months ago

Edit to add: I believe that everybody sees this… It’s just that some don’t seem to care and others continue to try to convince us that a system that has been proven not to work is the way to go simply because of partisan (not economic) differences.

The Republican Party and its sycophants continue to insist that ‘trickle down’ works… It doesn’t, the only thing that ‘trickle’s down’ is bribes to politicians.

The_Ohioan
Guest
The_Ohioan
3 years 8 months ago
SteveCH Not sure what objections I raised that you think the CBO addresses. Looked at the CBO report and it includes SSI disability and dependent’s benefits in comparing low to high earners tax/benefit ratio. As I said, that only muddies the water. If you look at only tax/benefit ratios of low as compared to high earners, the high earners get less because it’s progressive. All of which has little to do with all the income over $113,000 which is not being taxed and not increasing benefits at this time. Whether the tax/benefit ratio is still progressive, should that change occur,… Read more »
SteveK
Guest
SteveK
3 years 8 months ago
SteveinCH said: There are a lot of people who have a closed loop process of inquiry into the world…where facts and observations that disagree with beliefs are discarded or discredited, not through the presentation of alternative facts but simply because they don’t agree with the hypothesis. That approach to the world seems a very dangerous approach to life, or at least one that stifles learning. It seems like that goes in both directions… Here’s some other information directly from SteveinCH link to the CBO report: Average Corporate Income Tax Rate * 1/2 of what it was in 1979… across the… Read more »
Barky
Guest
3 years 8 months ago

The payroll tax cut was a mistake. Payroll taxes go towards social security, by reducing funding of social security it is putting the program at risk. Who benefits most from social security? The working class.

Reducing the payroll tax is like paying less into your 401K: it doesn’t “save you money”, it only screws you in the long run.

SteveinCH
Guest
SteveinCH
3 years 8 months ago

SteveK

Not sure what that has to do with anything I said but it’s all true. That said, looking at one tax in isolation isn’t terribly compelling which is what you are doing…cherry picking federal taxes that tell the story you’d like to tell.

The total tax rates in the tables encompass all of those taxes and tell exactly the story I told to Michael.

So no, I’d say it’s only working one way, at least on this topic.

Take care

wpDiscuz