Extend the Tax Holiday; Charge the Millionaires

"Don't raise taxes on the rich; they're the job creators!"

So goes a favorite argument against a proposed surcharge on the wealthy to "pay" for an extension of a payroll tax cut for average working people.

It's bunk.

Congress should extend the payroll tax, which would keep about $1,500 in the pockets of the people who need it the most. Lawmakers should offset the loss of revenue by imposing a short-term surcharge on the wealthy.

Neither party wants the payroll tax cut to expire on Dec. 31 — it would be a lousy Christmas present for voters in an election year. But how should the break be offset?

Democrats propose a surcharge on millionaires. Republicans propose spending cuts.

Spending cuts coupled with a smaller surcharge might be an acceptable compromise, but Democrats should stand firm. What they propose isn't exactly trustbusting: The wealthy wouldn't even pay the new tax until they had earned their first million dollars.

But what about all those jobs the rich "job creators" might stop creating?

Like we said — bunk.

Households earning more than $1 million a year make up only 1 percent of taxable units reporting business income. These "job creators" include law partnerships, hedge funds and private equity firms.

As Andrew Fieldhouse of the Economic Policy Institute noted, that's a far cry from the traditional small businesses and start-ups that actually are creating jobs. Tax increases on the wealthy have been shown to have little impact on consumer spending overall, Fieldhouse said.

The nation needs to have an honest discussion about taxation. We favor lower rates, especially for corporate taxes, but also a tightening of "tax expenditures" including some of the most popular. Lower rates could help boost growth; closing loopholes could bring in more revenue.

What is often lost in tax debates is that when the rich pay less in taxes, average Joes and Janes pay more. Fieldhouse estimates failing to extend the holiday would cost the average family about $920 a year. Putting more money into the pockets of people who are more apt to spend it quickly — that is, low- and middle-income people — is a better way to stimulate growth.

Fred Hiatt, in a commentary below, makes a good point when he worries about this tax cut becoming permanent and the effect that would have on Social Security.

But given the weakness of the economy, we think the need for middle-class tax relief trumps that concern right now.

Extend the tax holiday, and offset the lost revenue with a temporary surcharge on millionaires.

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