Friday, February 24, 2012

Income taxes are now bailing out Social Security

I'll wager that the vast majority of taxpayers are completely unaware (as I was until today) of the fact that the payroll tax cut "stimulus" that was enacted in December '10 and extended through this year was financed by income tax revenues. This represents an ominous milestone in the history of Social Security, since it marks the first time that the program has ceased to be a government-run annuity program and now operates at least partially as a pure income redistribution scheme. Charles Blahous lays out the facts and the implications in an excellent article, The Dark Side of the Payroll Tax Cut, which I have excerpted here:

In December 2010, President Obama and Congress reached an agreement whereby the Social Security payroll tax would be cut by two percentage points in 2011—from 12.4 percent to 10.4 percent—as a temporary stimulus measure. The president later proposed that the cut be extended and expanded in 2012. Before Congress went home at the end of 2011, it passed a 60-day extension of the two-point tax cut. The payroll tax cut has now been further extended to last throughout 2012 at least.
Most public discussion of the payroll tax cut has pertained to its efficacy (or lack thereof) as economic stimulus. Its greater policy significance, however, lies in another provision tucked into the same law. This provision is now transferring more than $215 billion in general tax revenues (e.g., income taxes) into the Social Security Trust Fund to make up for the reduction in payroll tax revenue.
In other words, the payroll tax cut is not really reducing the amount of tax revenues committed to Social Security. All that it actually does is to shift the Social Security financing burden from covered workers to others—most notably, to those Americans who pay income taxes. This is a transformative change to Social Security, reflecting goals for broader income redistribution now ascendant on the left end of the American political spectrum.
The new policy ends the longstanding requirement that Social Security expenditures be limited to the total amount of its tax collections (plus interest). And, by subsidizing payments with income taxes, it ends the idea that the Social Security benefits are fully “earned” by recipients.
The recent shift to income-tax-financing embodied in President Obama’s payroll tax cut policy cannot be said to represent a bipartisan agreement with this new policy view. Instead, the payroll tax cut was first proposed on the basis that it was necessary for economic stimulus, and later extended with the argument that doing otherwise would impose a painful tax increase on working Americans. The fact that the law also contained a provision to begin significant subsidization of Social Security with income taxes only belatedly gained the notice of the press, and not yet of the general public.
A critical milestone has nevertheless been passed. Beginning in December 2010, and continuing through to the present time, the federal government has embraced the policy of committing income taxes to subsidize benefits beyond those that Social Security itself can finance. Unless this policy is rapidly reversed, readers of this article who pay income taxes should brace themselves for the substantial new taxes they will soon be paying to bail out Social Security.

This is a very important article that deserves your attention. It's a "camel's nose under the tent" story of how and why our federal government's primary function these days is to redistribute income—60% of federal spending now consists of transfer payments—and how income redistribution will continue to expand unless it is forcibly rejected by the voters. Taking money from the more productive members of our society and handing it out to the less productive members can only result in the impoverishment of all, since it creates terribly perverse incentives to work less.

HT: Glenn Reynolds, one of America's MVPs.

P.S. Oh, and by the way, the payroll tax cut is one of the worst ways to use the tax code to stimulate the economy, since it does nothing to reward more work and risk-taking. So this whole "stimulus" program has not only harmed the economy, it's been used as a way to sneak greater income redistribution into our already bloated, redistributionist government. 

11 comments:

Benjamin said...

The huge entitlement programs have been financed by payroll taxes--and now income taxes also, according to this.

However, we also went for a few decades in which payroll taxes exceeded entitlement needs, and those excess taxes were used to run the government. Not sure if this not just payback.

I still come back to the big need: A cap on federal outlays as a fraction of GDP, that I recommend at 16 percent of GDP.

With trims in entitlements, and a serious demobilization of the Defense, VA and Homeland Security agencies, and elimination of Commerce and the USDA, I think it can be done.

Sadly, no one is calling for such cuts in federal outlays, in either party. The Dems love entitlements, and the GOP loves agency spending.

The taxpayer?

randy said...

For me, what comes to mind reading this is simply a deep desire for transparency. Get rid of all corporate taxes, all corporate and personal deductions, payroll taxes, incentives, credits... everything and have a simp flat tax that applies to all. To accommodate low income families give an across the board rebate without regard to income testing (similar to the brilliant Fair Tax idea). And just have clarity about relative tax burdens and to remove all the corrupting influence of tax policy. I'm concerned about the level of my tax burden, but more so about the frickin corrupt mess we have.

SteveSgt said...

Since the majority of the "most productive members of society" had a hundred-fold to many million-fold head start on the majority of their countrymen courtesy of the birth lottery, of course we shouldn't disadvantage them. The next potential Darwin or Einstein has a greater chance today of growing up hungry and finding their only available livelihood in joining a gang, rather than getting a college education, so of course we wouldn't actually want to embody the constitutional principle that, "all men are created equal." (end sarcasm)

This country's biggest income redistribution scheme was the near elimination of the estate and inheritance tax. That one stroke of the Reagan administration started a drastic redistribution upward, and spawned major growth in the "idle rich" class. Most productive citizens indeed!

How would it affect the economy if everyone's money went back to the state when they died, and everyone started out in life with a living wage stipend? You could grow as big as you wanted in life, but eventually it all, just like you, went back to the soil.

For balance, I recommend that you read some more at [ http://robertreich.org/ ].

Hans said...

Sorry, but the trust fund for SS is on empty, as the monies collected for it goes into the general fund; and that is why the pols will never reject it, until it collapses...

hswalj said...

This is a sad development. This and means testing destroys the government-run annuity concept.

Might as well stop the whole FICA stuff and go with a federal welfare program. At 66, file your application listing income and net worth. "To each according to his need, from each according to his ability." Karl Marx

djakel said...

SS has always been a ponzi scheme. This shifting of the funding source proves it. It was never set up to be funded like a defined benefit pension plan. Benefits are paid from current 'investors', not from the taxes collected from you and your employer years ago. Our benefits would be a lot lower if based on what we paid in, plus interest.
Once the younger workers finally understand this, they will demand the SS system be reformed. Some already have realized it. They can be found at the Ron Paul rallies.

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Most public discussion of the payroll tax cut has pertained to its efficacy (or lack thereof) as economic stimulus. Its greater policy significance, however, lies in another provision tucked into the same law. This provision is now transferring more than $215 billion in general tax revenues (e.g., income taxes) into the Social Security Trust Fund to make up for the reduction in payroll tax revenue.

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Most public discussion of the payroll tax cut has pertained to its efficacy (or lack thereof) as economic stimulus. Its greater policy significance, however, lies in another provision tucked into the same law. This provision is now transferring more than $215 billion in general tax revenues (e.g., income taxes) into the Social Security Trust Fund to make up for the reduction in payroll tax revenue.
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