To Hike or Not Hike Payroll Taxes

Sen. John McCain, R-Ariz., is provoking some ire among conservatives for a comment he made Sunday that appears to be a bit of a retreat from his no-tax-increase pledge.

On ABC's "This Week with George Stephanopoulos" show on Sunday, the presumptive Republican presidential nominee responded to a question about a hike in the payroll tax cap to ensure the long-term solvency of Social Security by saying, "There is nothing that's off the table. I have my positions, and I'll articulate them, but nothing's off the table. I don't want tax increases, but that doesn't mean that anything is off the table."

McCain otherwise has been firmly rejecting the notion of raising taxes, so the conservative advocacy group, the Club for Growth, wrote an open letter to him expressing astonishment over his latest pronouncement. "This statement has been particularly shocking because you have been adamant in your opposition to raising taxes under any circumstances," wrote Club for Growth president Pat Toomey.

However, McCain's camp has now backed away again from the notion of putting payroll taxes on the table. McCain spokesman Tucker Bounds told Fox News, "There is no imaginable circumstance where he could raise taxes."

Even if the cap on payroll taxes doesn't get raised, there are still ways for the Treasury to increase some of the revenue it gets from them. The Senate's Permanent Subcommittee held a hearing on a new Government Accountability Office report on companies that don't remit the payroll taxes they withhold. The GAO found that over 1.6 million businesses owed more than $58 billion in unpaid federal payroll taxes, including interest and penalties, as of last September (see Businesses Owe $58 Billion+ in Payroll Taxes).

The GAO has several ideas for how to get more companies to pay the taxes they owe. They include developing procedures for filing tax liens on a more timely basis and assessing penalties to hold parties personally liable for not remitting the payroll taxes they withhold. A bill that has been introduced in the Senate, S.1124, the Tax Lien Simplification Act, would streamline the tax lien system by establishing a centralized electronic tax lien registry and make it easier for the IRS to collect.

However, the $58 billion in uncollected payroll taxes is just a drop in the bucket compared to what will be needed to shore up the Social Security and Medicare systems that are largely supported by payroll taxes. After the failed effort in 2005 to reform Social Security, it's not clear that Washington has the will to cope with making major changes in the system anytime soon, whether McCain or his rival win the election in November. For now, cracking down on payroll tax cheats may go part of the way toward closing the estimated $300 billion tax gap, but it's not going to deal with more fundamental problems in the tax system.