A popular Washington game is to oversell tax cuts to lower-income people. Republicans have excelled at this for half a century. Now Democrats want to play, too.
In the most familiar version of the game, a Republican president promises to slash income taxes but ends up mainly doing so for rich people. Ordinary people may get a cut, but it’s very small. Thus President George W. Bush’s tax cuts in 2001 and 2003 boosted incomes for the top 1 percent by 6.7 percent but boosted incomes for the middle 20 percent only 2.8 percent, and for the bottom 20 percent a pathetic 1 percent. President Donald Trump’s 2025 tax bill actually lowered incomes for the bottom 20 percent when you factor in accompanying Medicaid and food stamp cuts, while incomes for the middle 20 percent rose only 1 percent or less. The wealthy made out like bandits; everybody else got table scraps at best.
Another Republican trick, perfected during the 2024 presidential campaign, is to eliminate taxes on stuff that scarcely gets taxed as it is. That’s what Trump did last year by eliminating taxes on tips. Only 4 percent of workers receive tips, and at least 37 percent of these people pay no income tax in the first place—and that’s before you figure in tax credits like the Earned Income Tax Credit. Also, let’s get serious, when the tip is in cash who’s going to report it as income?
A related Republican trick is to claim you eliminated taxes on something when actually you reduced them by not very much. That’s the gist of Trump’s supposed elimination last year of taxes on Social Security, about which he boasted in last month’s State of the Union Address. What Trump actually did was introduce a deduction of up to $6,000 for individual filers that’s phased out starting at incomes of $75,000. Given that people earning less than $75,000 pay little income tax in the first place, and that 15 to 50 percent of their Social Security benefits goes untaxed already, the impact was negligible.
Democratic Senators Chris Van Hollen and Corey Booker now propose tax cuts of their own. Von Hollen’s proposal would eliminate taxes on incomes up to $46,000 for individuals and up to $92,000 for married couples. Booker’s plan would double the standard deduction to $37,500 for individuals and $75,000 for married couples, and would also expand the child tax credit. These senators’ proposals deliver more benefit to lower-income people than those from their Republican counterparts, and Van Hollen and Booker sweeten the deal by also increasing taxes on higher incomes. No one would call these plans a stalking horse for trickle-down economics. Still, it seems to me that they miss the point.
Booker helpfully presents a tax calculator with his proposal. I entered an income of $65,000, the maximum household earnings for the bottom 40 percent in the income distribution. For a single filer with no kids, Booker’s plan would boost after-tax income by 4 percent. That’s not nothing, but it’s is well under the 6.7 percent that Dubya’s tax cuts delivered to the top one percent. As for Van Hollen’s plan, people earning less than $50,000 seldom pay income tax as it is.
Remember Mitt Romney’s famous complaint in 2012 that 47 percent of the population paid no income tax at all? (The real percentage was 46 percent, which since then has dropped to 40 percent). Some of Mitt’s 47 (now 40) percenters are rich jerks who dodge tax liability, but most of them are low earners. Romney’s complaint drew on a tendentious conservative literature (about which I’ve written many times) that complains too many Americans are insulated from the cost of government. The trouble with this argument is that, when you factor in all taxes at the federal, state, and local level, pretty much everybody pays them. Indeed, at the time Romney made his 47 percent crack, the middle 20 percent paid nearly as much effective tax (25 percent) as the top one percent (29 percent), while the bottom 20 percent paid a not-inconsiderable 17 percent. That goes a long way toward explaining why Romney lost the election.
State taxes are more regressive than the federal income tax, but the chief reason Romney’s “untaxed” pay quite a bit in tax is the federal payroll tax, or FICA (for 1935’s Federal Insurance Contributions Act). About 70 percent of Americans pay more FICA tax than federal income tax because the federal income tax is reasonably progressive at the low end (more so, anyway, than at the high end) while the FICA tax, which funds Social Security and Medicare, is not progressive at all. The Social Security tax is regressive in two ways: It’s a flat tax (12.4 percent, split by employers and workers) plus it doesn’t apply to any income above $184,500. The other FICA component, Medicare tax, is a smaller 2.9 percent split by employers and workers, which is also regressive, but the Medicare tax has no income cap, and attached to it is a surtax, the Net Investment Income Tax, that makes Medicare funding more progressive.
It’s hard for anybody, Republican or Democrat, to give the working class much of an income-tax cut because the working class doesn’t pay much income tax to begin with. These earners are under the impression that they pay a lot of income tax because they pay a lot of FICA tax, which gets deducted from their paychecks along with their deductions for income tax. But it’s workers’ FICA tax that really pinches, and it’s their FICA tax that we should cut.
Last year the Tax Foundation created a tax calculator to show how Trump’s Big, Beautiful Bill would affect John Q. Taxpayer. What it mostly showed was that John Q. Taxpayer pays so much in FICA taxes that any income-tax cut will scarcely register unless he’s rich. For example, a hypothetical person named Amber with no kids earns $75,000. Amber now pays—since Trump’s Big, Beautiful bill did pass—$4,960 in income tax. But Amber pays more than twice that amount—$11,475—in FICA tax. Sophie and Chad, a hypothetical couple with two kids, earn $165,000. They pay $8,000 in income tax. But they pay more than three times that amount—$25,245—in payroll tax.
I’m going to repeat this point because it’s important: About 70 percent of Americans pay more in FICA tax than they do in federal income tax.
Democrats hesitate to talk about cutting payroll taxes because the Medicare and Social Security trust funds are both projected to go bust in the next decade. Given the disproportionate clout wielded by older voters, only a fool would put these programs at further risk. But we don’t have to put them at further risk! It’s entirely possible to cut payroll taxes for lower-income people and offset any losses by increasing payroll taxes on higher-income people. We could, for instance, eliminate the regressive income cap on the Social Security tax. Or we could substite for the flat 12.4 and 2.9 percent Social Security and Medicare taxes progressive brackets that mimic (or, better yet, improve on) those in the income tax. We might even do both. Also, Trump gets it exactly backwards about taxing Social Security benefits. Instead of pretending not to tax these, we should tax 100 percent of them, instead of the 50 to 85 percent that we tax today. Or, if “meddling with Social Security” feels just too politically forbidding, Congress could create a refundable income-tax credit averaging, say, $3000, designed specifically to offset FICA payments, as my friend the former Oregon Secretary of State Phil Keisling proposed last year in The Washington Monthly. Phil’s income-tax credit could be offset with higher income taxes on the rich.
What Democrats shouldn’t do is oversell the prospect of small income-tax cuts for working people when the real source of the trouble is FICA. This is an eminently fixable policy problem. Indeed, we’ll have to change funding for Social Security and Medicare before 2033 or so just to keep them going. While the hood is up why not fix the regressivity problem too? Audentes Fortuna Iuvat. Fortune favors the bold.
