The Problem With Eliminating the Payroll Tax Is there one?

Any thoughts on the vat tax in Rand Paul's proposal? I am not an economist nor do I know for sure what is correct.

Rand Paul and Ted Cruz want to end the payroll tax, but haven't explained what comes next.

The payroll tax has some problems. It penalizes work and it's burdensome, especially for low-wage workers, because it kicks in at the first dollar. Also, the half of the tax that's collected from employers is hidden from workers, making it harder for taxpayers to see the true cost of their government.

Unfortunately, getting rid of the payroll tax would cause even bigger problems, unless it's done as part of a well-thought-out entitlement reform.

The payroll tax finances two large benefit programs – 6.2 percent goes to Social Security and 1.45 percent goes to Medicare Part A. If the payroll tax went away, we would have to find another way to pay for those benefits. Paul and Cruz would turn to a value added tax, known as a VAT. Because their plans would also slash income taxes, the VAT would end up funding much of the government's general operations, as well as Social Security.

Unfortunately, a VAT has many of the same problems as the payroll tax. And using it to pay for Social Security would have repercussions for the program that the candidates haven't thought through.

A VAT would penalize work, just as the payroll tax does, because it would tax what workers buy with their wages. Like the payroll tax, a VAT would kick in at the first dollar. And, because the type of VAT that Paul and Cruz are proposing wouldn't be listed on customer receipts or pay stubs, it would be even more hidden than the payroll tax.

More important, once the payroll tax was gone, Social Security would no longer be a self-financed program with its own funding source. Instead, it would draw on the same general revenues as other government programs.

More:

http://www.usnews.com/opinion/economic-intelligence/articles/2015-12-28/...

This was written by Alan D. Viard.,

Short background on Mr. Viard, "

Alan D. Viard is a resident scholar at the American Enterprise Institute (AEI), where he studies federal tax and budget policy.

Prior to joining AEI, Viard was a senior economist at the Federal Reserve Bank of Dallas and an assistant professor of economics at Ohio State University. He has also been a visiting scholar at the US Department of the Treasury’s Office of Tax Analysis, a senior economist at the White House’s Council of Economic Advisers, and a staff economist at the Joint Committee on Taxation of the US Congress. While at AEI, Viard has taught public finance at Georgetown University’s Public Policy Institute. He also cohosted the New York University Law School tax policy colloquium in the spring 2015 semester. Earlier in his career, Viard spent time in Japan as a visiting scholar at Osaka University’s Institute of Social and Economic Research.

A prolific writer, Viard is a frequent contributor to AEI’s “On the Margin” column in Tax Notes and was nominated for Tax Notes’s 2009 Tax Person of the Year. He has also testified before Congress, and his work has been featured in a wide range of publications, including Room for Debate in The New York Times, TheAtlantic.com, Bloomberg, NPR’s Planet Money, and The Hill. Viard is the coauthor of “Progressive Consumption Taxation: The X Tax Revisited” (2012) and “The Real Tax Burden: Beyond Dollars and Cents” (2011), and the editor of “Tax Policy Lessons from the 2000s” (2009).

https://www.aei.org/scholar/alan-d-viard/ 

Viard received his Ph.D. in economics from Harvard University and a B.A. in economics from Yale University. He also completed the first year of the J.D. program at the University of Chicago Law School, where he qualified for law review and was awarded the Joseph Henry Beale prize for legal research and writing."