A simple tax reform to help relieve inequality

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.