NEW YORK (CNNMoney) -- Democrats say imposing a millionaire surtax to help pay for the cost of extending the payroll tax cut is only fair. Republicans say it would be a job-killer.
The GOP instead wants to foot the bill by leaning heavily on the middle class primarily by reducing the cost of federal workers. They would freeze pay, curb future retirement benefits and reduce the workforce through attrition.
How to pay for the payroll tax cut is still one of the most divisive issues facing Congress as it begins yet another round of endgame brinksmanship, one that also involves a bill to keep the government funded for the rest of the year.
Can anyone say "déjà vu all over again?"
The millionaire surtax faces long odds. Lawmakers have already voted down a surtax of 5.6%, then 3.25% and most recently 1.9%.
But the idea of taxing the rich will come up again and again next year, since themes of income inequality and tax fairness will be sounded repeatedly on the campaign trail.
Payroll tax cut: What's at stake
Urban Institute resident fellow Howard Gleckman points out that an extra tax on millionaires may make for great politics but it would make for awful policy, although not for the reasons that many in the GOP suggest.
Republicans still cleave to the notion that to ever ask millionaires to pay more in taxes will bring the economy to a screeching halt because it would hurt small business job creation.
But there are problems with that reasoning:
--A very small percentage of tax filers with business income make more than $1 million.
--There is no way to tell how many new jobs those millionaires create.
--And business income can come from activities that don't result in a lot of hiring, such as owning rental property or investing in a partnership.
For Gleckman, a big problem with the millionaire surtax is that it feeds the myth that the super rich can pay for everything. They can't. There are not enough of them.
Payroll tax cut divide: How to pay for it
And by applying a surtax here and a surtax there, soon you're talking serious rate creep -- to levels that could be counterproductive. The higher rates become the more likely it is that the rich will look for ways to avoid paying them.
If the Bush tax cuts expire, the top income tax rate on high-income households could approach 50%, and the rate on capital gains could double if ever there's a 5.6% millionaire surtax, Gleckman noted in the blog TaxVox.
That's in part because there's already a new Medicare tax that will apply to investment income and wage income for high-income households starting in 2013.
Despite the flaws in the parties' strategies -- Democrats always reach first to tax the rich and Republicans always rush to protect them even at the expense of everyone else -- each contains a bit of truth the other side will have to accept sooner or later.
Both the rich and the middle class eventually will have to contribute to efforts to spur the economy and stabilize the federal budget.
"Democrats today can't solve our nation's many budgetary woes primarily by taxing the rich, and Republicans risk alienating the middle class when they try to spare the rich from sharing the additional burdens most Americans soon must bear," former Treasury official Eugene Steuerle wrote in his public policy column "The Government We Deserve."
The rich will have to pay more in taxes, he notes, because even if spending is cut across the board, they won't feel the pinch since they don't rely on government spending to get by.
And the middle class will eventually need to accept some spending cuts and tax increases, Steuerle said, "not because the rich can't pay more, but because most income in the economy resides with that 80 percent of the population that is neither poor nor rich."
cnn.com
The GOP instead wants to foot the bill by leaning heavily on the middle class primarily by reducing the cost of federal workers. They would freeze pay, curb future retirement benefits and reduce the workforce through attrition.
How to pay for the payroll tax cut is still one of the most divisive issues facing Congress as it begins yet another round of endgame brinksmanship, one that also involves a bill to keep the government funded for the rest of the year.
Can anyone say "déjà vu all over again?"
The millionaire surtax faces long odds. Lawmakers have already voted down a surtax of 5.6%, then 3.25% and most recently 1.9%.
But the idea of taxing the rich will come up again and again next year, since themes of income inequality and tax fairness will be sounded repeatedly on the campaign trail.
Payroll tax cut: What's at stake
Urban Institute resident fellow Howard Gleckman points out that an extra tax on millionaires may make for great politics but it would make for awful policy, although not for the reasons that many in the GOP suggest.
Republicans still cleave to the notion that to ever ask millionaires to pay more in taxes will bring the economy to a screeching halt because it would hurt small business job creation.
But there are problems with that reasoning:
--A very small percentage of tax filers with business income make more than $1 million.
--There is no way to tell how many new jobs those millionaires create.
--And business income can come from activities that don't result in a lot of hiring, such as owning rental property or investing in a partnership.
For Gleckman, a big problem with the millionaire surtax is that it feeds the myth that the super rich can pay for everything. They can't. There are not enough of them.
Payroll tax cut divide: How to pay for it
And by applying a surtax here and a surtax there, soon you're talking serious rate creep -- to levels that could be counterproductive. The higher rates become the more likely it is that the rich will look for ways to avoid paying them.
If the Bush tax cuts expire, the top income tax rate on high-income households could approach 50%, and the rate on capital gains could double if ever there's a 5.6% millionaire surtax, Gleckman noted in the blog TaxVox.
That's in part because there's already a new Medicare tax that will apply to investment income and wage income for high-income households starting in 2013.
Despite the flaws in the parties' strategies -- Democrats always reach first to tax the rich and Republicans always rush to protect them even at the expense of everyone else -- each contains a bit of truth the other side will have to accept sooner or later.
Both the rich and the middle class eventually will have to contribute to efforts to spur the economy and stabilize the federal budget.
"Democrats today can't solve our nation's many budgetary woes primarily by taxing the rich, and Republicans risk alienating the middle class when they try to spare the rich from sharing the additional burdens most Americans soon must bear," former Treasury official Eugene Steuerle wrote in his public policy column "The Government We Deserve."
The rich will have to pay more in taxes, he notes, because even if spending is cut across the board, they won't feel the pinch since they don't rely on government spending to get by.
And the middle class will eventually need to accept some spending cuts and tax increases, Steuerle said, "not because the rich can't pay more, but because most income in the economy resides with that 80 percent of the population that is neither poor nor rich."
cnn.com
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