Ending the payroll tax would help fix our flawed social compact

by Ryan Streeter on November 26, 2012. Follow Ryan on Twitter.

Ross Douthat makes the case for eliminating the payroll tax and covering our beloved entitlement programs through a modified income or related tax scheme. He rightly (in my opinion) argues thus:

Payroll taxes are a relic of New Deal Machiavellianism: by taking a bite of every worker’s paycheck and promising postretirement returns, Franklin Roosevelt effectively disguised Social Security as a pay-as-you-go system, even though the program actually redistributes from rich to poor and young to old. That disguise has helped keep Social Security sacrosanct — hailed by Democrats because it protects the poor and backed by Republicans as a reward for steady work.

But the costs of this disguise have grown too great to bear. Whatever its past political advantages, the payroll tax now imposes an unnecessary burden on a stagnating economy. In an era of mass unemployment, mediocre wage growth and weak mobility from the bottom of the income ladder, it makes no sense to finance our retirement system with a tax that falls directly on wages and hiring and imposes particular burdens on small business and the working class.

I am deeply sympathetic to this view. Peter Drucker once said that we should ask whether we would do something the way we are currently doing it if we weren’t in that business to begin with. When it comes to our entitlement programs, we have to ask ourselves if we’d really structure them the way we currently run them if we were inventing them now. I think the answer is an obvious “no way.”

The payroll tax should be among the first things to go in a reinvention.

Reihan Salam has some good commentary and analysis on Douthat’s column here.