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The W-2 step; the Democrats are right that the Social Security tax is unfair, but they're wrong about how to fix it.

Consider Clayton Karioka, who serves up "Hazelnut," Amaretto," and "Decaf Genuine Guatemala Antigua" coffee from behind the counter at Bucks County Nut & Coffee Company in Washington's Union Station, where Hill staff and even the occasional political celebrity go to eat. ("You can always tell when someone's here," he says, 'cause the Secret Service come for coffee.") Karioka enjoys his job, guessing what the customers are going to order, joking with the cops who walk by, trying to pick up Spanish from Union Station's janitorial staff. He works from 6:30 in the morning until 2:00 in the afternoon, five days a week, and makes $5.50 per hour-$1.25 more than the minimum wage-with a raise scheduled after he's been with Bucks County a year.

All in all, the pay's not bad for a young, single man-until the government takes its cut. Karioka doesn't know it, but he's one of the chief victims of a sly shift in the tax burden that, despite the Reagan tax cuts of the early eighties and the Democratic reforms that came later, has left low-income workers paying as much as 28 percent more in taxes than they did in 1980. It's a shift that Senator Daniel Patrick Moynihan brought to national attention with his proposed Social Security tax cut-a dumb plan, but one driven by a commendable analysis that should send all Democrats who preach "tax fairness" scurrying to their calculators and tax tables to come up with a smarter solution.

Karioka seems to have a line on most any subject, from welfare reform to gender difference in coffee selection, but ask him about his taxes and he goes blank. "Hold on," he says, and pulls a crumpled check stub out of a cupboard. Over the course of two weeks, he made $402, counting overtime but not tips. Of that, the federal government withheld $40.71, the Social Security Administration $30.77 (on the line marked (FICA"), and the D.C. government $22.18. That left Karioka with $308.34 to live on. But witness the first miracle of the federal tax system: Half the Social Security tax vanished from his wages before he even received his check (50 percent of the 12.4 percent tax is paid by your boss; in planning what he has to pay his employees, he adds in his share of the tax as part of the total cost, which means if the government didn't get that money, you would).

Now, while the progressive income tax was cut at the beginning of the decade, Social Security taxes were being hiked so that today's workers would salt away savings against their retirement. But, as Moynihan pointed out, the government is essentially treating the payroll tax like any other tax, not saving its revenue to fund pensions but blowing it on federal projects like John Sununu's skiing holidays. In other words, the Social Security tax has become an income tax by another name, with two important differences: We all pay the same rate, and we pay it on the first to the 53,400th dollar of our incomes, after which the affluent pay nothing.

Factoring in the employer's share of Social Security shows that Karioka pays 24 percent of his income to the federal government, and 29 percent for taxes overall, before he gets back his refund of excess withholding. (This is the second miracle of federal taxes: Uncle Sam often withholds more than he should, which means that workers generously provide their government with interest-free loans-in Karioka's case, a loan of $323.75-for as long as 16 months, to be paid back after the workers file. This scam is more familiar to upscale taxpayers: "As investments go," The Wall Street Journal recently warned its readers, "tax refunds rank among the biggest losers.") Once you allow for the refund, Karioka winds up paying 21 percent of his income, excluding sales taxes, to the feds, most of it in Social Security taxes. Overall, even though their income tax rates went down, childless workers in Karioka's income group saw their federal tax burdens rise 10.7 percent in the eighties. Poorer Americans fared even worse. The tax burdens of the 20 percent of families (those without children-more on this later) who make less than Karioka rose about 28.5 percent, according to the Congressional Budget Office (CBO). Meanwhile, Americans in the richest fifth of the population, where Social Security taxes take less of a bite, watched their tax burdens drop 4.6 percent.

Karioka's federal taxes leave him $8,435.25 annually, before D.C. takes its chunk, and $7,880.75 afterward (another trick of the Reagan tax changes was to transfer more of the burden to state tax codes). That's what Karioka has left to feed, house, clothe, and improve himself. Unlike the businessmen who jam the halls of the Capitol to rail against capital gains taxes or the guys in suits who stood outside the White House last fall holding signs that read, "HONK IF YOU HATE TAX HIKES," Karioka never really notices what he's paying. "I don't pay attention to it," he says with a shy grin. "All I do is just deposit it to my account and keep on going. . . . No matter what's pulling you down, there are things you can enjoy." For our purposes, set aside the miracle of human nature and simply witness the third miracle of withholding: The payments don't seem real when you don't write a check. Multiply Karioka by about a hundred million people and imagine the potential for the Democrats if someone would make those payments seem real and show those workers how they've been swindled.

As a result of Reagan's bait-and-switch tax cuts, 69 percent of American families emerged from the eighties paying more in Social Security taxes than they do in income taxes-which is the main reason that the poorer 60 percent of families pay more in federal taxes than they did in 1980. That's the important message Moynihan helped deliver. Unfortunately, his proposed solution wouldn't have done much to correct the problem. Moynihan wanted to cut the Social Security tax for everyone by I percent, an idea that played beautifully in the media: The "common man's tax cut," U. S. News and World Report called it, while The Wall Street Journal, more sensitive, preferred the "working person's tax cut," labels that invoked sweaty brows, aching shoulders, and Miller Time, without getting too specific about which workers would benefit most from the change. Ron Brown, chairman of the Democratic National Committee, which endorsed Moynihan's proposal, offered the typical, unsatisfying summation: "Pat Moynihan," he explained to a meeting of the party faithful, "wants to keep money in the pockets of American working families." No doubt. But the questions no one asked were: which families, and how much?

Since Brown is a successful lawyer, his family probably stood to make the maximum, about $657. That's the average break for families in the richest fifth of the population, families who cashed in on the tax cuts of the eighties. By far the largest portion of the total cut would go to this group. Meanwhile, families in America's poorest fifth-ones that watched their before-tax incomes fall by 5.5 percent in the eighties and their after-tax incomes by 7 percent-would pull in a whopping $73. Karioka would get about two bucks a week. And here's the kicker: Moynihan's bill calls for the tax to return to its current rate in 25 years, and then to climb even higher in order to cover the retirement benefits of those who would benefit from the tax break today. In sum: Moynihan wanted to soak our children to bribe the rich to give a small tax break to the poor. Is this the "fairness" Democrats stand for?

Look at what happens when you set your top target for those who deserve a break a little lower. The Moynihan plan would have given every American worker, from the gas pumper to the investment banker, a 1 percent Social Security tax break; the average annual cost to the treasury over the next six years, using the senator's conservative figures, would be $27 billion. For less than that, you could give every taxpayer in the poorest 40 percent of the population, where incomes run up to an average of $27,400 for a family of four, a 25 percent federal tax cut. Talk about feeling treated fairly: Karioka would get a reward from his government of $639. Unsatisfied with less than an electoral majority? Then how about giving the bottom 40 percent a 15 percent break, and the middle 20 percent a 7 percent cut? You'd still be spending less money than Moynihan.

Of course these reforms are expensive propositions. But there are ways to pay for them that reinforce the notion that those who can derive the most pleasure from their income should bear the greatest burden of taxation. (Precisely because, though they complain more, by any objective standard they should feel less pain: Taking 21 percent away from Karioka hurts him much more than taking an equal percentage from a multimillionaire.) One way to offset these tax losses through the Social Security system would be to treat benefits as ordinary income and tax them at normal rates, with a provision to avoid double-taxing workers' original contributions; conservatively extrapolating from CBO numbers, this would raise up to $75 billion by 1995. Another solution would be the Democrats' famous surtax on millionaires, first proposed during the budget battle last fall to bluff George Bush and now reintroduced by Senator Albert Gore. This was derided in the press as a purely symbolic gesture, but in fact it would raise $44.3 billion by 1995. The most aggressive solution, recommended by the group Citizens for Tax Justice: Raise the income tax rates on corporations and individuals making more than $250,000 to 38 percent, still well below the "confiscatory" levels that drove Ronald Reagan into the arms of Barry Goldwater. This one change would raise more than $30 billion per year.

More buck for your bang

There appear to be two main obstacles to the Democrats proposing this type of reform; you might call them the kids-only approach and the $80,000 attitude. The latest Democratic tax initiative, put forward by Gore and Rep. Tom Downey, falls into the kids-only trap. It dispenses its break in the form of beefed-up credits, based on the number of children a family has.

Calculations of Americans' tax burdens focus on families with children, and those numbers tend to drive Democratic tax policy. Like the Gore proposal, the successful reforms of 1986 and 1990 also aimed at expanding credits linked to the number of children in a given family. This is why, though the tax burden has dropped somewhat for poor Americans with children since 1985, it has continued to rise for those, like Karioka, who are childless. The kids-only approach certainly makes sense in principle-families with children deserve extra help. But Democrats have pursued this type of reform to the exclusion of assisting the childless, who, among Americans making less than $25,000, outnumber those with children by almost two to one. So far, Democratic tax reform has left the vast majority of low-income Americans doing an awful lot of work to take care of their fellow citizens' kids.

In one crucial respect, Gore's proposal is a major improvement on Moynihan's: Rather than offering virtually the same break to all, it discriminates among workers, concentrating benefits on poorer families. But, like the Moynihan plan, it still scatters its benefits way up the income scale, to families that pull in as much as $75,000 per year. Why? Because it's got an $80,000 attitude.

That attitude springs from the fact that, these days, the Democrats have gone a bit soft on the middle class. As Majority Leader Dick Gephardt put it after the budget negotiations last fall: "We have begun to redefine the debate from 'to tax or not to tax' to who pays, and is it fair?' This gives us a shot at reclaiming large groups of middle-class Americans who haven't been excited about Democrats for quite some time." The problem is, another term the Democrats have begun to redefine is "middle class" itself. When you ask Gephardt to whom he's referring, you get a glimpse into the mindset behind the Moynihan and Gore tax cuts: "Various definitions," he says. "It's hard to get great agreement. But we're certainly talking about people under $80,000. We're talking about the vast, broad majority of America that we believe to be the middle class."

Under $80,000. Vast majority, indeed. Only 7.6 million Americans make more than $53,400 per year. The vast, broad majority are closer to Clayton Karioka: Of the 133 million wage earners in the U.S., fully 67 million-just over 50 percent-make $15,000 or less. Seventy-one percent earn $25,000 or less. OK, you're thinking, but Gephardt probably means family income, not individuals' salaries. Fair enough. A family of four living in a big city may find it hard to make ends meet on $80,000. But these people already received tax breaks in the eighties. Today, society could best relieve their financial worries not through changes in the tax code but through means like controlling college tuition and medical costs. And fundamentally, no matter how aggrieved they feel, such families are statistically not middle class. In 1990, the richest fifth of the population, for families of four, began at $76,000. In the statistical middle, people don't make lawyers' salaries or doctors' salaries-or even congressmen's salaries. The average for a family of four in the middle fifth in 1990 was $39,200, half the amount suggested by Gephardt.

Democratic leaders feel they have to stretch the middle class to accommodate wealthier Americans, because those taxpayers make the biggest fuss about their burdens. But sounding like Republicans is a strange way to offer voters an attractive alternative to George Bush. Bolder leaders would instead carry the tax fairness message to Bucks County Nut & Coffee, to wake up workers who are being ripped off but don't know it. They would discover that this is one of those happy instances in which doing the right thing for the country means doing the right thing for the majority-that is, doing the right thing politically. If advocates of tax fairness are serious about helping those workers who are getting swindled by the Social Security switcheroo-those workers who most need a boost to improve their skills and move up-they'll stop playing with the middle class as though it were a Slinky and put the money not just where the most, but where the most deserving, mouths are.
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Author:Bennet, James
Publication:Washington Monthly
Date:Jun 1, 1991
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