Social Security Tax Cut: A Deal Breaker Print
Dean Baker
The Hill, December 9, 2010

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The extension of President Bush’s tax break for the richest 2 percent of taxpayers is the least popular part of the deal between President Obama and the Republican congressional leadership. However, the plan for a temporary reduction of 2 percentage points in the Social Security payroll tax is by far the most dangerous.

There are positive aspects to the proposed reduction in the payroll tax. First, it would be progressive. The tax cut would only go to those with wage income, as opposed to capital gains, dividends or other forms of income from assets. And, it is capped like the payroll tax. This means that Bill Gates would get a no larger tax cut than a skilled electrician who earns $110,000 a year.

For this reason it is also likely to be a relatively effective form of stimulus. Bill Gates doesn’t spend his tax cuts. People earning $20,000-$40,000 a year are likely to spend most of any tax cut they receive. When we have near double-digit unemployment, we need all the spending that we can get. The tax cut will put roughly $120 billion into workers’ pockets. Perhaps $90 billion of this, or three quarters, will be spent. This could provide enough of a boost to GDP to create more than 300,000 jobs.

Also, the Social Security trust fund will be reimbursed for the lost revenue. Under the deal that President Obama worked out with the Republican leadership, funds from general revenue will replace the lost tax revenue for the next two years. This means that the tax break will have no effect on the long-term solvency of Social Security.

In spite of these positive features of the proposed tax cuts those who care about the future of Social Security should strongly oppose it. The reason is simple: The proposed 2013 end date may not be a real end date.

As adults know, members of Congress and presidents find it difficult to take back tax breaks once they have been made. If we envision what the world looks like two years from now when this tax break would expire, we will have Republicans running for office complaining about Democrats who want to raise taxes on ordinary working people in the middle of a recession.

Democratic officeholders have had difficulty standing behind tax increases for the very richest people in the country. It is difficult to imagine them sticking their necks out for tax increases that will hit low and middle-income workers. In other words, it is very plausible that in the 2012 election, Democrats will feel the need to take the Republican pledge that they will never raise taxes. This means that the reduction in Social Security taxes may not be for just two years, it may be for the indefinite future.

In principle there is nothing wrong with financing a portion of Social Security benefits with money from general revenue. This was in fact the original intention of President Roosevelt when he designed the program. However, the fact is that the program has always been financed exclusively by the Social Security tax that is taken from workers’ wages. This makes the tax regressive, but it has the advantage that workers can quite legitimately say that they have paid for their benefits. This will be to some extent less true if a portion of the funding comes from general revenue rather than payroll taxes. In short, getting funding from general revenue opens a new line of attack on the program.

The prospect of this tax cut being the basis for a renewed attack on Social Security could be dismissed if the program had defenders in high places, but this does not appear to be the case. Most of the Republicans would almost certainly like to privatize Social Security.

Unfortunately, the Obama Administration cannot be counted on to defend the program either. In fact, top officials in the administration seem to view attacks on Social Security and its supporters as a way to prove their manhood. President Obama’s decision to appoint two arch-enemies of Social Security to chair his Fiscal Responsibility commission certainly does not inspire confidence among supporters of Social Security.

In short, supporters of Social Security have good reason to oppose the tax deal. It is easy to have the same stimulus with an expanded version of President Obama’s Making Work Pay tax cut. Supporters of Social Security should reject the latest deal and tell President Obama to stand behind his own tax cut. This is what presidents are supposed to do.