The Smart, Targeted Tax Cuts Democrats Should Champion

Considerable arm twisting from the White House and Speaker Mike Johnson finally forced a few Republican deficit hawks to cry “Uncle Donald!” on February 25, when the House passed a resolution intended to permanently restore a raft of temporary tax breaks from Trump’s 2017 “Tax Cuts and Jobs Act” (TCJA).  

Not surprisingly, the lion’s share of these cuts will benefit America’s most affluent. One analysis shows that half the savings flow to the top 5 percent of households making $320,000 or more.  

But Republicans haven’t been foolish. Among the TCJA’s soon-to-expire provisions, several are working-class and family-friendly. Largely due to the 2017 Trump tax cuts’ higher standard deductions and more generous child tax credits, a family of four with two dependent children and two working parents earning a combined $100,000 a year now pays just $4,000 in federal income taxes.  

In addition to the $4.5 trillion tag over 10 years for extending TJCA’s expiring provisions, enacting Trump’s 2024 campaign promises will likely cost trillions more.  

These include no taxes on tips, overtime, or Social Security benefits. Trump also promised full deductibility of car loan interest payments on American cars and all state and local property, sales, income, and other taxes (the so-called ‘SALT deductibility’ issue). 

Sure, the final package could take months to enact. And whether these tax cuts ultimately cost $5 trillion—or even $10 trillion—is still TBD. 

But does anyone doubt that House and Senate Republicans will do whatever it takes—e.g., phony up their budget assumptions, replace the Senate Parliamentarian, perhaps even temporarily override the filibuster—to deliver this most visible of campaign promises? 

Congressional Democrats want to derail —or at least slow down or diminish—this tax cut train by ginning up enough public outrage over mass firings, agency dismantlings, recession-risking tariffs, and draconian cuts to popular programs.  

But if that’s the Democrats’ only strategy, it smacks of magical—if not delusional and dangerous—thinking. 

After all, if this “Defense! Defense!!” strategy doesn’t work, what’s Plan B? 

Fortunately, Democrats can—and arguably must—fight this battle on two fronts, not just one. 

Rather than merely scold, “Fiscally irresponsible!” Democrats can and should be eating the Republicans for lunch by offering a far better-designed “Working Americans Tax Cut” plan of their own.  

Such a plan would especially help America’s paycheck-to-paycheck workers and their families and be no more expensive than the Republicans’ final version—whatever that is. But it would be laser-focused on putting vastly more money into the pockets of America’s most deserving employees, self-employed contractors, and entrepreneurs. 

Key to this beat-the-Republicans-at-their-own-game strategy is the question: “What’s the biggest tax most Americans pay?” 

No, it’s not federal income tax. 

For roughly 70 percent of Americans, their most significant tax bite goes by the initials “FICA,” which stands for “Federal Insurance Contribution Act.” These extractions are the payroll taxes levied to finance Social Security and Medicare.  

In contrast to the federal income tax code, with its myriad deductions, credits, differential rates, and exemptions, FICA taxes are levied starting on the first dollar of wage and self-employment income. The Social Security obligation applies to the first $176,100 of income; there’s no cap for Medicare taxes. 

Remember that family of four earning $100,000 that pays $4,000 in federal income taxes? 

If both parents are employees, they pay an additional combined $7,650 in FICA taxes. If both are self-employed, their FICA taxes, including the “employer” match, are $15,300. 

So, should we slash payroll taxes instead of income taxes? Absolutely not—and for a very simple reason.  

Even at this level of “tax bite,” Social Security and (especially) Medicare face looming shortfalls. Indeed, Trump’s reckless proposal for “tax-free” Social Security benefits—even for billionaires—would worsen the problem, as these revenues are specifically earmarked to shore up the program.  

The Democrats’ plan instead should create a hefty—and refundable—“tax credit” to reduce taxpayers’ federal income tax liability, dollar-for-dollar, for a significant portion of the FICA payroll taxes now paid by more than 150 million working Americans. By making the credit refundable, the most hard-pressed workers with little or no income tax liability would get an actual check back from the IRS.  

A radical, untested idea? Hardly. Two versions of this concept already exist in the federal income tax code.  

A refundable credit for FICA taxes paid is precisely the mechanism behind one of Ronald Reagan’s favorite poverty-fighting programs: the Earned Income Tax credit.  

However, while the EITC benefits about 25 million taxpayers, it’s largely restricted to full-time wage earners who barely earn the minimum wage and have dependent children. Why stop there? 

The second version of this concept applies to over 10 million self-employed workers. Current federal law offers a partial income tax break to reduce these taxpayers’ net liability and help ease that whopping 15.3 percent combined FICA tax impact. 

And what’s the rallying cry for Republicans—and yes, some Democrats, too—who hope to restore full deductibility for the “state and local taxes” (aka “SALT”) paid by more affluent taxpayers? It’s “End Double Taxation!”  

The logic here is certainly plausible: If I’m already paying $20,000 in state and local taxes, why also demand federal income taxes on the same $20,000?  

But if “double taxation” is such a grievous offense to basic concepts of tax fairness, shouldn’t the same logic apply equally—if not even more powerfully—to the FICA payroll taxes paid by America’s less well-off working men and women?  

Another selling point of this idea is its simplicity. Most taxpayers’ IRS forms would require just one new line: “How much FICA taxes did you pay last year?”  

And how powerful—and superior to the Republicans’ plan—would this be in delivering genuine tax relief to “paycheck-to-paycheck” and other hard-working Americans for the same (or even less) cost?  

So, let’s do some math and address a few possible concerns. 

About 180 million Americans currently pay FICA taxes, totaling about $1.8 trillion in revenues.  

For just $5.4 trillion over 10 years—likely far less than the Republicans’ ultimate tax cut package will cost—each FICA payee could get a refundable credit averaging $3,000.  

But why give every FICA payee this tax break, including the Elon Musks and Warren Buffetts of the world? Target this benefit to over 140 million American employees and self-employed in low through upper-middle-income households, and an average credit of $4,000 would cost just $5.6 trillion. And if the “TCJA+Trump” tax cut package ultimately costs $7 trillion, then just raise that average to $5,000. 

Whatever the eventual price tag for the Republicans’ inevitable multi-provision, fine-print laden—might we even say “Frankenstein-like”—tax cut package, Democrats should match it, dollar-for-dollar, with this far more understandable and powerful “Working Americans Tax Cut.”  

Indeed, if a big tax cut is inevitable, why wouldn’t the Democrats try to beat the Republicans at their own tax giveaway game? 

OK, so let’s address four objections likely to arise. 

First objection: Wouldn’t this reduce Social Security and Medicare revenues and thus undermine their long-term solvency?  

Not at all. The two trust funds would still get every penny of FICA taxes levied. As with the Republicans’ current approach, the foregone revenue would come from lower federal income tax receipts.  

Second objection: Without comparable budget cuts, wouldn’t such an enormous tax cut significantly increase the deficit? 

Sure. But given real-world politics, such a concern entirely misses the point – while depriving Democrats of their best strategy to counter the Republicans’ “We’re the champions of working Americans!” tax-cutting hypocrisies. 

Democrats certainly can’t pass anything like this on their own. And if they succeed with their parallel strategy—to shrink the potential “tax cut bucket” by forcing Republicans to abandon specific budget cuts as too politically painful—they can adjust the size of their tax cut proposal accordingly. 

But to die on the hill of “We won’t propose a far better tax cut plan because…well, it will increase the deficit?” Dumb. 

Third objection: By ‘mislabeling’ payroll levies as “taxes” rather than “insurance contributions”—the “IC” in “FICA”—don’t we risk undermining these programs’ broad and long-standing public support? 

This one is worth unpacking a bit.  

Ever since Social Security was enacted in 1935 and Medicare passed in 1965, the argument against those who would deride these as welfare programs or (even worse!) “socialism ” has been that these are “social insurance” programs.  

That is, as if every wage earner’s FICA payments went into a personalized account, whose contents would accordingly be disbursed once recipients became eligible.  

But neither program—nor especially Medicare—has ever worked this way. Workers might pay FICA taxes their whole lives—and then die without receiving a penny. As a “pay as we go” system, today’s retirees are primarily financed by the FICA taxes of today’s (and tomorrow’s) workers. 

Besides, how many of today’s workers—10 percent, 5 percent, 1 percent —who pay FICA levies see them as anything other than a tax? In fact, aren’t they now universally called “payroll taxes?” Not to mention that many Americans—especially younger ones—don’t even believe Social Security will exist when they retire.  

There are also other reasons to consign this tortured, It’s-not-a-tax construct to the dustbin of history.  

Trump upended decades of Republican orthodoxy on “reining in entitlement spending” by promising in 2016 to “never touch” Social Security and Medicare. And sure, some of Trump’s recent moves—and comments by Musk calling Social Security “a Ponzi scheme”—have cast doubt on this promise, to the delight of Democrats and the consternation of Republicans.  

Republicans know that making meaningful cuts to either program would be politically reckless, if not downright fatal.  

And what better way to forge even stronger, inter-generational support for these programs than saying to today’s workers, “In recognition of the burden you’re carrying to ensure the vitality of these programs, we’re proposing that the federal income tax code gives you a break!”  

The bottom line is that FICA levies walk, quack, and bite like a tax. Let’s stop pretending otherwise. 

Fourth objection: Might some taxpayers benefit less from this plan than the “House plus Trump” version? 

Yes. But for the most part, that’s a feature, not a bug. 

Remember, even with Trump’s passel of extra cuts, the eventual Republicans’ plans will still be skewed heavily toward the affluent and (especially) the uber-wealthy.  

Meanwhile, millions who think they’ll pocket more if their tip, overtime, car loan interest, and/or Social Security benefits are exempt will get nada…zilch…nothing if they don’t make enough to pay income taxes in the first place.  

Although some paycheck-to-paycheck workers might not do as well under this plan, there’s an elegant, truly marvelous solution.  

Eliminating most of the major provisions of TJCA and keeping the four best for the vast majority of working Americans—the higher standard deduction; the larger child tax credit; the elimination of personal exemptions; and the limitation on SALT deductibility—will actually generate an estimated $1 trillion more in federal revenue over the next decade. (The other eight major provisions of TJCA will cost an estimated $5.5 trillion in the next ten years.) 

By supporting the restoration of these provisions—I’ll dub them TCJA’s “Fantastic Four”—Democrats could offer an extra $1 trillion for additional, carefully targeted cuts.  

For example, during their 2024 vice-presidential bids, J.D. Vance and Tim Walz advocated for an even higher child tax credit. Rather than giving even billionaires tax-free Social Security benefits, raise the “tax-free” threshold that’s been frozen for 30 years. And why allow unlimited SALT deductibility when modestly increasing the current $10,000 limit is sufficient to help the most deserving? 

Whatever the combination of ideas, here’s the bottom line. 

If a proposed multi-trillion tax cut aims to help working Americans—be they employees, contractors, or self-employed business entrepreneurs—then Democrats should make the “Working Families Tax Cut” the core of any package. As appropriate, they can augment it with other ideas, including those offered by the Republicans. 

There will be tax cuts. The only questions are how massive they’ll be—and whether they’ll primarily benefit the wealthy or entirely benefit the working and middle-class Americans who deserve them more.