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Home Publications Op-Eds & Columns The Social Security Tax Cut and the Ignorance of Political Experts

The Social Security Tax Cut and the Ignorance of Political Experts

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Dean Baker
Al Jazeera English, September 20, 2011

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Political consultants have a well-deserved reputation as being some of the most incompetent human beings ever to walk the planet. Mark Penn, Hillary Clinton’s top aid in her 2008 presidential campaign, famously remarked that the American people will not elect someone named Barack Hussein Obama as president. Mr. Penn received several million dollars for his work on the Clinton campaign.

This background must be kept in mind when we have these people tell us that we should not worry about the future of Social Security just because President Obama has proposed extending and expanding the 2.0 percentage point cut in the payroll tax. Under President Obama’s proposal, the Social Security trust fund would be credited with the same amount of revenue as if the tax cut were not in place, just as is happening in 2011.

While there is nothing in principle wrong with financing Social Security in part out of general revenue for two or three years in the middle of a severe economic downturn, the question is what will happen when the economy recovers enough that we no longer need this tax cut as stimulus. In principle the tax should simply revert to its normal level.

As the Congressional Budget Office recently projected, this would be sufficient to keep the program fully funded through the year 2038 and more than 80 percent funded through the rest of the century. Those familiar with arithmetic know that the program as currently structured is essentially fine long into the future.

However, it is not clear that Congress will allow the tax to revert to its normal level of 6.2 percent on both the employer and employee. Democrats in Congress have already been railing against Republicans who appear reluctant to extend the payroll tax cut. They have complained that Republicans, who support tax cuts for billionaires, are willing to raise taxes on ordinary workers.

Of course Republicans are much better at this anti-tax rhetoric. And they will be able to remember what the Democrats said this fall when it’s time to restore the tax to its normal level in 2012, 2013, or 2015. They will not be shy to attack the Democrats for wanting to raise taxes on Joe the Plumber and friends. Would anyone bet on the Democrats standing up to these attacks?

If the Social Security tax were not restored to its former level, then we could in principle continue to make up the difference from general revenue. However, there certainly is no agreement that this will be done. Since its inception, Social Security has been financed from the designated payroll tax. This tax has been used to sustain the trust fund, which is in principle separate from the rest of the budget.

This arrangement is not written in stone. However, without a clear commitment to support Social Security from general revenue, there is little reason to expect that Republicans, and even many Democrats who are openly hostile to Social Security, will suddenly turn around and agree to establish a whole new funding source for Social Security. More likely they will note the worsened financing of the program and insist on the urgent need for cuts in benefits.

Now the political consultants tell us not to worry about this scenario. But these people are not counting on Social Security to support them in their retirement. Nor for their matter is President Obama and most of the members of Congress who are pushing the Social Security tax cut. If this leads to sharp cuts in benefits it will be just one more of the bad breaks that has resulted from their decisions – kind of like this recession itself.

There is a very simple way around this potential problem. If we want to give a tax cut to workers equal to 3.1 percent of wages, as President Obama has proposed, along with a similar cut to some employers, we can just write that into the law without any reference to Social Security.

In other words, the tax cut would take the form of a tax credit that is paid out to workers and firms in exactly the amounts that President Obama proposed. However this credit would have no connection whatsoever to the Social Security tax, which continues to get collected at its normal rate.

This should involve zero additional administrative expense compared with what President Obama has proposed; it is simply a change in terminology. It is possible that Republicans who would support a cut in the Social Security tax would balk when it is described as a tax credit. This should tell us something.

It would be unfortunate if Congress did not pass something like this tax credit, which would give a modest boost to the economy and create close to 1 million jobs. However, the people who wrecked the economy and put us in this horrible situation should not be allowed to blackmail the country into surrendering Social Security.

We can find many ways to create jobs.  We don’t have to take the one route that may come with the permanent cost of ending Social Security as we know it. And the reassurances from the highly paid political consultants who tell us that Social Security is not endangered are worth as much as their assertion that Barack Hussein Obama would never end up in the White House.


Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

 

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