A sim­ple tax re­form to help re­lieve in­equal­ity

The Mercury News Weekend - - OPINION - By SteveKopp­man Oak­land res­i­dent Steve Kopp­man has worked as a gov­ern­ment an­a­lyst at fed­eral, state and lo­cal lev­els. He holds a mas­ter’s de­gree in pub­lic pol­icy from UC Berke­ley.

Grow­ing in­come in­equal­ity gained dra­mat­i­cally in­creased at­ten­tion last elec­tion year and must not be for­got­ten as tax re­form gets to the top of Wash­ing­ton’s agenda.

Ad­vanc­ing tech­nol­ogy and glob­al­iza­tion skew in­comes in com­plex ways that are hard to counter. At the same time, the United States main­tains a tax struc­ture that ex­ac­er­bates in­equal­ity — and the emerg­ing Repub­li­can tax plan would make things worse.

How should any­one sup­port­ing a less un­equal so­ci­ety re­spond be­yond say­ing “No”?

While the fed­eral ‘ in­come tax’ is al­ready pro­gres­sive — tak­ing a larger share as in­come rises — over­all, the United States has a rel­a­tively re­gres­sive tax sys­tem with a flat, capped So­cial Se­cu­rity pay­roll tax, and state and lo­cal gov­ern­ments largely funded by re- gres­sive sales and prop­erty taxes.

If we want to make in­come dis­tri­bu­tion less un­equal, why not re­struc­ture our taxes to al­le­vi­ate in­come in­equal­ity rather than wors­en­ing it?

We can’t look at ‘in­come tax’ and ig­nore ‘pay­roll tax’ — also a tax on in­come — es­pe­cially since half of work­ing Amer­i­cans don’t pay the for­mer.

As part of tax re­form, the best pro­posal Democrats could make to al­le­vi­ate in­come in­equal­ity — the sim­plest change with great­est ben­e­fit — would fold So­cial Se­cu­rity’s pay­roll tax into the al­ready pro­gres­sive in­come tax struc­ture.

Candidate Trump re­peated con­sis­tently in Repub­li­can de­bates last year that the wealthy didn’t pay enough tax and mid­dle-class and poor peo­ple paid too much. He em­pha­sized tax re­form must ben­e­fit low- and mid­dle-in­come peo­ple more than the rich. The cur­rent Repub­li­can plan doesn’t.

Part of suc­cess­ful op­po­si­tion to Pres­i­dent Trump should high­light how candidate Trump’s more egal­i­tar­ian pre­scrip­tions can be achieved while driv­ing a wedge be­tween con­gres­sional Repub­li­cans and Trump vot­ers.

Fold­ing So­cial Se­cu­rity into the pro­gres­sive in­come tax would al­le­vi­ate in­come in­equal­ity. It can be rev­enue-neu­tral (not wors­en­ing deficits) yet stim­u­late the econ­omy (since lower-in­come peo­ple gain­ing more af­ter-tax in­come will spend a greater por­tion of what they re­ceive).

Cur­rently, the So­cial Se­cu­rity tax, which is flat and capped, is re­gres­sive: It takes a larger in­come share from lower-in­come work­ers, ac­tu­ally wors­en­ing in­equal­ity.

Its flat rate has bal­looned since in­cep­tion, in­ten­si­fy­ing this ef­fect. The tax that started at 1 per­cent each for work­ers and em­ploy­ers in 1937 has risen to 6.2 per­cent for So­cial Se­cu­rity (7.65 per­cent, in­clud­ing Medi­care). This rad­i­cal in­crease for So­cial Se­cu­rity re­flects higher ben­e­fits and a grow­ing ra­tio of ben­e­fi­cia­ries to con­trib­u­tors.

This 6.2 per­cent is paid up to the cap ($127,200 of in­come in 2017). Above that the tax is zero.

So the equal­iz­ing goal of the pro­gres­sive in­come tax is re­versed by the re­gres­sive pay­roll tax.

This sit­u­a­tion is much worse for the grow­ing share of ‘self-em­ployed’ work­ers, from Uber drivers to free­lance writ­ers, who — no mat­ter how low their in­come — must pay nearly dou­ble to cover both the worker and em­ployer shares.

This flat/capped struc­ture is why low-in­come peo­ple of­ten pay over 20 per­cent in com­bined pay­roll and in­come tax, es­pe­cially if self-em­ployed, sur­pass­ing the 15 per­cent multi-mil­lion­aire and 2012 Repub­li­can pres­i­den­tial candidate Rom­ney re­ported pay­ing.

End­ing worker pay­roll tax — off­set by in­creased in­come tax — would mean higher-in­come earn­ers would pay mod­estly more and lower-in­come earn­ers sub­stan­tially less. In­come tax bills would rise ap­prox­i­mately 35 per­cent to re­place lost worker (in­clud­ing self-em­ployed) pay­roll taxes for So­cial Se­cu­rity and Medi­care. The same funds re­sult, but who pays shifts.

Fold­ing So­cial Se­cu­rity into the pro­gres­sive in­come tax struc­ture — rather than keep­ing sep­a­rate taxes pulling op­po­site di­rec­tions on in­come dis­tri­bu­tion — could cre­ate a more pro­gres­sive tax sys­tem, re­duc­ing in­equal­ity, sim­pli­fy­ing taxes and main­tain­ing rev­enue-neu­tral­ity while stim­u­lat­ing the econ­omy.

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