Payroll taxes for Social Security and Medicare comprise about 37% of federal revenue, making them the second biggest tax in the country, behind only the individual income tax. Why should we regard them as bad? I will give my thoughts beneath the orange whatchamadoodle.
Project Omaha is an effort to put together a Daily Kos consensus tax system to counter the Republican proposals that would make the rich even richer. My first two diaries on the subject were:
An Ex-Republican Tries to Make Amends
Our Beloved Income Tax
I do not by any means think that the discussion about the individual income tax system is settled, but it seems right to first come to a consensus regarding payroll taxes and corporate income taxes. This diary addresses payroll taxes, and I will be blunt about my position. I will be extremely disappointed if Kossacks approve of the present regressive system for funding Social Security benefits. Nevertheless, I remain open to any and all suggestions.
Just what is the character of Social Security? In reality, it is the taxes collected today that fund the benefits the retired receive today. Up to this point in time, the payroll taxes collected have exceeded the benefits paid, so the system is working, at least so far, but projections show that this will not continue indefinitely. The point is that Social Security is not a savings plan, although politicians and the rich like to portray it as such, though for different reasons.
Politicians like to pose as guardians of the "trust fund", but that term only refers to the accumulated excess of tax receipts over benefits paid. In truth, nothing has been accumulated except IOU's; the trust fund is invested in Treasury notes. There is nothing here that even vaguely resembles a savings plan; the actual revenue has been spent. This is not to say that the trust fund has been "raided". The treasuries have value that lies in the ability of the federal government to impose taxes, and this ability will persist into the indefinite future. (If not, we are all screwed.) But Social Security is a PAYGO system. There's nothing wrong with that; it's a good thing, but let's not pretend it is some sort of savings plan. I don't know of a politician who specifically calls it a savings plan, but when they use words like "lock box" and "trust fund" they give that general impression.
The 1% also like the "savings plan" metaphor, because it gives them cover. Since the 99% are just making deposits to their savings account, it's not really taxation, and the 1% can pretend payroll taxes don't exist. Scott Hodge writes:
During his speech last night, President Obama spoke about the need for shared sacrifice in any plan to reduce the nation's debt. He insisted that some taxpayers were not paying their fair share of taxes and that they should pay more taxes as part of a balanced approach to deficit reduction.
While the target of the President's remarks were those taxpayers earning over $250,000, he could have just as well been talking about the record 51 percent of Americans who now pay no income taxes and, thus, contribute nothing to the basic cost of government. (From a web page dated July 26, 2011. Emphasis mine.)
Title 26, Subtitle C calls payroll taxes "Employment Taxes", so Hodge is technically telling the truth, but only technically. Intellectual honesty would require adding the words " ... although they pay payroll taxes ...". Instead of being honest, Hodge chose to deceive the reader by omission. It's a Republican thing.
Consider the 20-year-old worker just starting out. She makes the minimum wage, and pays a tax from her very first paycheck almost equal to Warren Buffet's tax rate. She will not get a dime in benefits for the next 45 years. Chances are that she doesn't know (or care) that her share of the total tax load falls under Subtitle C rather than Subtitle A of Title 26. Now along comes a millionaire and accuses her of not paying any taxes at all. Is it any wonder that she joins her local Occupy movement? (You go, girl!)
I think Social Security benefits should come from general tax revenue raised through a progressive income tax rather than from the regressive payroll tax. It really is as simple as that. If we did this, the rich would shoulder a larger part of the burden than they do now. The poor and middle class would have lower taxes, and the rich would have higher taxes. All by itself, this is reason enough from the standpoint of maximizing the well-being of all citizens. The last dollar a 1% earns from his investments does not produce nearly as much human satisfaction as does the last dollar that a 99% earns. Even if you buy the proposition that the 1% "deserves" a particular dollar more than a 99% does, it would still diminish human well-being to give that dollar to the 1%.
But, the argument goes, if we did that, the 1% would soon be impoverished, and the 99% would make a living without having to raise a finger. With nobody working, our economy would grind to a halt. I suppose that's true enough if the idea were taken to its extreme, but nobody is proposing to take it to an extreme. Suppose a 1%, say the CEO of a successful company, were to have his spendable income cut from $5 million to $4 million. He would surely eat just as well; his bed would be just as soft, his house just as warm, his lawn just as green, his dog just as well-groomed, his necktie just as elegant. Maybe his fifth vacation home would be a bit smaller. Maybe he would have to do without a second private jet. Maybe his stock portfolio would not grow quite as much. Yes, take away a million dollars, and there would be some belt tightening, but the intrinsic quality of his life would change very little.
Since we have increased his tax load by $1 million, we can decrease the tax load of a thousand 99% families by $1,000. It's not exactly instant riches, but they can eat a little better, or live in a slightly better neighborhood, or help their kids go to college. Every one of those thousand 99% will benefit more than the 1% will lose in terms of human well-being.
Moreover, the extra $1,000 that the 99% saves in taxes will be immediately converted into demand for goods and services, which will spur the production of wealth. If retained by the 1%, much of it would have been used to add to his portfolio, which would do nothing for the nation, except to increase the power and influence of the 1%. It is an obvious fact that supply side economics has entirely failed. We have excess industrial capacity to supply wealth, but we are not using it because demand has dried up.
Ah, but what about incentives? Economists are fond of saying that if you tax something, you will get less of it. So, does that mean that our CEO will slack off and become less productive? This is just bollocks; people just don't behave that way. Does the professional golfer swing more lazily when the prize fund is lower? Is the surgeon more careless with his scalpel if his fees get lowered? Does the software developer write better code if you raise his salary? No, the worker generally does his best, regardless of compensation. As I write this diary, I am doing my very best to write it well, but I will never profit as much as a dime for doing so. Our hypothetical CEO will still do his very best, even though we have raised his taxes by $1 million. That's the way successful people behave. It's why they are successful.
So far, I have just given you the standard argument for a progressive tax system. You've seen it before. You understand it intuitively even without it being explained to you. Really, it's pretty obvious, and I'm just preaching to the choir. The 1% probably understands it as well, but many of them just don't give a shit. To their credit, some of them do care; Warren Buffett comes to mind, for example, as does DKos' own AZ Desert Rat. I happen to think that the argument for progressivity is so compelling that this argument alone is sufficient to close the deal. However, there is another argument that I'd like to advance toward funding retirement benefits through general tax revenue that I find equally compelling.
I retired about six years ago. During my working life that spanned about 45 years, the standard of living in this country has increased enormously, and I contributed to that increase. My tax dollars helped to put public infrastructure into place--roads, bridges, airports, waterways, government buildings, etc. My purchases helped companies to grow and develop the technology we take more or less for granted. My ideas and innovations in my field of expertise, however small, contributed their bit to the economy. In short, I was instrumental, as were millions of other workers, in creating the awesome economic engine that today produces wealth that was literally undreamed of 50 years ago.
The 1% of today wouldn't have any of the tools that they now take for granted were it not for us. Those microprocessors didn't just blossom like wild daisies. The cell phone towers didn't grow like trees. Communications satellites didn't fly into orbit on their own. Lasers and fiber optics and microwave ovens didn't invent themselves. The internet didn't "just happen" one fine Tuesday morning. Yet the 1% take all these tools and use them to make fortunes, without giving a passing thought to those who put those tools in their hands. Now they expect the 99% to bear virtually the entire burden of funding the retirement of those whose work and talent have enabled them to become rich.
This, then, is my proposal. Repeal Social Security taxes and Medicare taxes and instead fund Social Security benefits and Medicare from general revenue that is derived from a progressive tax code. Adjust tax rates to make the change revenue neutral. This relatively simple change would shift the burden towards those who have benefitted the most from the work done by those who are now retired. I am hopeful that the comments will generally support this proposal.
Old Business
In my last diary I botched a poll on excise taxes, so I'm repeating it here. For the purposes of this poll, sin taxes are defined as taxes on alcohol, tobacco, and gambling. There are, of course, other excise taxes besides the ones mentioned in this poll, but the results of this poll ought to give us some general direction. For the record, I will vote for "None of the above", because I hate regressive taxes, but I suspect my opinion will have little or no influence on your vote.