A Tax Cut Republicans Don’t Like?

Ross Douthat comes out on the side of the angels in proposing the abolition of the Federal Insurance Contributions Act tax, the “payroll tax”:

The payroll tax holiday that passed Congress in the winter of 2010 was a rare exception to this pessimistic rule. Cutting the payroll tax was good short-term politics for both Democrats and Republicans: it was a tax cut that liberals hoped would double as stimulus, and a boost to the middle class that conservatives could support without embracing new federal spending. But more important, it opened the door to what would be good long-term policy as well — because more than almost any feature of the American tax code, the payroll tax deserves to be pared away into extinction.

But now Washington is in danger of practicing payroll-tax bipartisanship of a more destructive sort. While the White House and Congressional Republicans wrestle over where to set income tax rates and how and whether to cut spending, the payroll tax holiday has been orphaned. Lacking noisy champions and press attention, it’s in danger of expiring at the end of the year out of political indifference.

That outcome would be unfortunate. Payroll taxes are a relic of New Deal Machiavellianism: by taking a bite of every worker’s paycheck and promising postretirement returns, Franklin Roosevelt effectively disguised Social Security as a pay-as-you-go system, even though the program actually redistributes from rich to poor and young to old. That disguise has helped keep Social Security sacrosanct — hailed by Democrats because it protects the poor and backed by Republicans as a reward for steady work.

A general rule of thumb, based on straightforward principles of supply and demand, is that, if you tax something, people will produce less of it. The payroll tax is a tax on jobs and income, particularly on jobs and income where the wage is less than the FICA maximum limit, presently $100,100. Do we really want fewer jobs and less income? FICA falls particularly hard on workers at the lower end of the payscale. Because of its maximum limit it is a regressive tax.

The Social Security retirement payment plan is not now a “pay as you go” system. For the last several years revenues have fallen below mandated disbursements. The difference is made up out of the general fund (essentially, 40% of that is borrowed). One of the ironies of the frequent longing citation of progressives over the Swedish welfare system is that Sweden’s social insurance system is a pay as you go system. Disbursements are limited to revenues, something I strongly suspect would dismay its American fans if it were implemented here. If it were implemented here, the Social Security system would become permanently solvent with the swipe of a pen.

When you combine the FICA tax liability with costs incurred as a result of working and decreasing eligibility for various benefits with increasing income, a significant number of people are actually discouraged from working. This is a perverse result and we should eliminate it.

Eliminating FICA is a good first step in that direction. It would have the additional beneficial effect of reducing the bookkeeping requirement for businesses and individuals. Have you noticed how many nominees to appointive office fall afoul of paying taxes on behalf of their domestic employees? That’s not because they’re cheap or, at least, not just because they’re cheap. It’s because it’s arduous.

13 comments… add one

  • Zachriel

    Dave Schuler: The Social Security retirement payment plan is not now a “pay as you go” system. For the last several years revenues have fallen below mandated disbursements.

    Social Security has run surpluses for a generation in order to set aside for the baby boomers retirement. Those surpluses were invested in U.S. securities. Once those securities are gone, then unless something is done, Social Security benefits will be cut to 75% to balance receipts. That’s pay-as-you-go.

  • TastyBits

    The present system allows Social Security to be modified more easily. Without the FICA tax, SS would not be going broke, and there would be no need to amend it. Medicare is not strongly tied to the payroll tax, and there is no mechanism to slow its growth.

    The purpose of taxes should be to generate revenue for the gov’t to operate. Using taxes to modify behavior is not a proper use of the taxing power. The tax code is a mess because of incentives. One person’s tax incentive is another’s loophole.

    For FICA, I would remove the cap, and adjust the rate if needed. Having the same rate for all eliminates the tax rate arguments. Increasing rates on the rich also increases the rates on the poor. I would advocate a similar approach for income taxes – eliminate all deductions except a standard deduction, include all income, have one standard rate. Corporate taxes should be treated similarly or eliminated.

    The number of people who have modified their work production because of taxes is minimal. This is the same argument Republicans are making for lower taxes on the rich.

  • Zachriel:

    You’re describing the accounting. I’m describing the pragmatics. Last year’s revenue shortfall was paid from the general fund, 60% of which comes from revenues the other 40% from new borrowing.

  • The number of people who have modified their work production because of taxes is minimal.

    I don’t think there’s any way of determining the actual numbers. Since telling the truth would jeopardize present benefits, I strongly suspect that many would lie if asked.

  • steve

    Since the 1980s, federal revenue has been tilted away from the income tax and towards payroll taxes. It does cause some hassle, but most of us use payroll companies. Do away with the payroll tax and corporate income taxes.

    Steve

  • Zachriel

    Dave Schuler: You’re describing the accounting. I’m describing the pragmatics. Last year’s revenue shortfall was paid from the general fund, 60% of which comes from revenues the other 40% from new borrowing.

    Social Security is a pay-as-you-go system, and has set aside more than enough for the next several years. After that, it will pay 75% of benefits in perpetuity. As for the general fund, it is woefully underfunded. The U.S. has been robbing poor Peter to give Paul a tax break.

  • Social Security has run surpluses for a generation in order to set aside for the baby boomers retirement. Those surpluses were invested in U.S. securities. Once those securities are gone, then unless something is done, Social Security benefits will be cut to 75% to balance receipts. That’s pay-as-you-go.

    Yes, that is fine, but the problem is that it still leaves a huge fiscal hole. If the Social Security has to dip into those “invested” funds then the money to repurchase those securities have to come from the general fund.

  • Jimbino

    Social Security and Medicare do a lot worse than redistribute wealth from the young to the old and the rich to the poor.

    They also redistribute from the Black Male who worked all his life to the White Widow who has not worked a day in her life. They redistribute from the single to the married; a person who marries a different foreigner every 10 years starting at age 25 and who dies married to the last after qualifing at age 65, will leave behind 5 foreign spouses to collect SS benefits, though none had ever worked a day. The Black Male is expected to die real soon after qualifying for SS benefits, while the White Female is financed for an expected 10 years more, whether she has worked a day or not. SS also redistributes wealth from workers to the disabled, through SS disability benefits. It also redistributes from the childfree to the breeders in the form of benefits given minor children of a living or dead parent.

  • Andy

    Social Security has run surpluses for a generation in order to set aside for the baby boomers retirement. Those surpluses were invested in U.S. securities. Once those securities are gone, then unless something is done, Social Security benefits will be cut to 75% to balance receipts. That’s pay-as-you-go.

    As Dave said, that’s accounting, but not how it works in reality. No money was “set aside” or invested, rather a security was issued and the money was spent on other government functions. The government can’t “cash in” those investments to raise money for Social Security because government can’t “invest” in the traditional sense.

    Consider how these securities will be paid back to the Social Security fund. The money will only come from the methods government has available to raise money: Taxes, reduced spending in other areas, or by creating the money.

  • Zachriel

    Andy: No money was “set aside” or invested, rather a security was issued and the money was spent on other government functions.

    It’s a fact that Social Security ran a surplus for years. That the U.S. decided to use those surpluses to fund income tax cuts with the promise the tax cuts would pay for themselves doesn’t change that Social Security is a pay-as-you-go system. The securities held by Social Security are just as valid as any the U.S. offers, and they will be redeemed as provided by law. In any case, the general budget has to make up for those funds it borrowed.

    Andy: The money will only come from the methods government has available to raise money: Taxes, reduced spending in other areas, or by creating the money.

    Or borrowed from other sources. Or change the law.

  • Zachriel:

    It appears we are mutually unpersuadable. I think that a “pay as you go system” must be based on cashflow. You think it can be based on assets.

  • Jimbino

    We could finance a lot of SS, Medicare and welfare by selling off our racist national parks and forests.

  • Zachriel,

    Yes, SS ran surpluses. Yes that money was “invested” in government securities–i.e. bonds. Now, the government needs to “cash in” those bonds to get the money to mail to SS recipients. So the government has to take money from somewhere, most likely the general fund, and buy back its own securities that the SS Trust Fund is holding. Really, there is no “extra money” in this process.

    When you do all the basic math there, the result is the same, the money has to come from somewhere…either higher taxes, existing revenues, or additional borrowing–i.e. future taxes.

    It is really just that simple.

    Or borrowed from other sources. Or change the law.

    Borrowing = future taxes, so not really another “option”. Changing the law does not result in more money, but most likely smaller payouts on average.

Leave a Comment