Harry Reid's Jobs Surcharge

A temporary tax cut paid for by permanent tax increases.
DECEMBER 2, 2011
WSJ.com

So here's the latest Democratic growth plan: Pay for a temporary tax cut that has already proven not to create jobs with a permanent tax increase that almost certainly will cost jobs.

That's the essence of Senate Majority Leader Harry Reid's plan to finance a one-year payroll tax cut with a 3.25% income tax surcharge on upper-income Americans that would last for at least 10 years. Mr. Reid knows it can't pass the House, and as we went to press it looked likely to fail even in the Senate.

But this is the way it goes in the Senate these days where the real goal isn't to pass anything but to put Senate Republicans on the class-warfare spot. If they vote no, Mr. Reid and President Obama will claim that Republicans voted to deny a tax cut on the middle class. If they vote yes, he'll taunt them for breaking with their tea party supporters and also backing a tax increase. Meanwhile, Democrats can posture as opponents of "the 1%" to consolidate their base going into an election year.

The Democratic tax plan would cut the 2012 payroll tax in half for employees, to 3.1% from 6.2% and by another half to 3.1% from 6.2% for employers with less than $5 million in payrolls. The cost would be roughly $250 billion. But let's remember the history here. In December 2010, Republicans and Mr. Obama agreed to a two-percentage point reduction in the 12.6% payroll tax for this year.

Early this year the White House cited estimates by Deutsche Bank economists that the $110 billion payroll tax holiday would boost GDP growth by 0.7 percentage points to 4% in the months ahead. This was based on the usual Keynesian modeling. Instead, the economy has decelerated—from 2.8% in 2010 to barely above 1% this year. As for the predicted boost to jobs, the unemployment rate has stayed at or above 9%.

One reason the payroll tax cut hasn't worked is that it is temporary. Few employers who hire more than temporary workers see much of a gain from a temporary hiring incentive. Employers may also see through the Washington tax bait-and-switch, figuring that they'll pay for the temporary tax cut with higher taxes later.

Mr. Reid's surcharge—which would hit incomes of $1 million and above—would slam small business job creators. Congress's Joint Committee on Taxation estimates that taxpayers will declare about $1.2 trillion of business income in 2013. Only a fraction of those small business owners and Subchapter S companies will have a net income above $1 million, but Joint Tax finds that 34% of that $1.2 trillion is on tax returns with "modified AGI [adjusted gross income] in excess of $1 million." This means about $400 billion of business income would be subject to Mr. Reid's profits surtax.

Mr. Obama's own Treasury Department examined 2007 IRS data and found 392,000 returns with incomes above $1 million. Some 311,00, or more than three out of four, were classified by Treasury as "business owners." Perhaps Democrats can explain how taking money from employers is going to lead them to hire more workers.

By the way, Mr. Reid's surcharge comes on top of the tax increase that will hit when the Bush tax rates expire at the end of 2012. So if Mr. Reid has his way, the top income tax rate will climb to 44.5% in 2013. And because dividend income will again be taxed as ordinary income starting in 2013, the dividend tax goes to 44.5% from 15% today.

And don't forget that the ObamaCare investment income tax surcharge of 3.8% also begins in 2013, so stock owners are going to be happy to hear that the new dividend tax rate could be 48% in the name of tax fairness. This will only deter business investment, which is critical to job creation and higher wages.

We hear some Republicans are nervous about this payroll tax debate, but they shouldn't be. If Republicans can't oppose a tax increase in a weak economy, they don't deserve to win the Senate majority. If they don't want to vote against a payroll tax cut, they can vote to offset the cost with spending cuts.

Like the entire Democratic agenda these days, Mr. Reid's tax gambit is preoccupied with income redistribution and politics. Fairness is trumping growth in Washington, which explains why we are getting so little of either.