A little income redistribution

I've been thinking about Robert Reich's ideas for pulling out of our economic malaise, and one of them strikes me as especially direct and sensible. At the moment, workers pay 6.2% payroll tax on their first $106,800 of gross income. One of the ideas floating around Washington lately has been a "payroll tax holiday," during which time that payroll tax would not be deducted from workers' paychecks.

As a temporary stimulus, such a tax holiday might do some good — provided workers used the extra money for new consumption rather than paying down debt. Concerns over the financial health of Social Security and Medicare, however, make the idea a political non-starter. A far better stimulus would be direct aid to the states, so they can save state jobs and, perhaps, provide additional help to citizens in severe need.

Reich suggests a permanent exclusion of the payroll tax on the first $20,000 of a worker's income, and an imposition of payroll tax on further earnings beyond $250,000. I'll go him one better — exclude the first $20,000, and remove the upper cap entirely. If that rule were in place for this year, earners of up to $126,799 of gross income would see a reduction in their tax liability. Those who earn more would end up paying more, but still no more than the 6.2% paid by the lowest income earners today. Let's look at some figures:

What currently is a regressive tax becomes a progressive tax. The poor, who spend more than they save, have more to spend. The rich, who save more than they spend, have no significant change in lifestyle — just a bit less wealth. Those in the middle — even those in the well-above-median $125,000 to $150,000 earnings bracket — see little or no change in their family finances.

Would the change bring in enough new revenues to "save" Social Security and Medicare? I'll let the actuaries work that out. One thing is sure, though: anybody earning over a million dollars a year can afford to pay $61,000 in payroll taxes!