--Original title "FICA Jujitsu: REAL? URGENT? YOU TELL ME?"--
I’m going to make the audacious claim that one simple idea has the potential, if Democrats rallied around it as a simple yet signature and structural progressive policy commitment at this precise moment of CRISIS OPPORTUNITY, to be a game-changer for the economy, the country and the electoral fortunes of Democrats, and the historical legacy of the Obama presidency.
Here it is, in two simple parts.
1. Cut the Social Security FICA rate for both employees and employers, permanently.
2. Remove the Social Security FICA income cap, permanently.
A major Progressive revolution can happen if we rally behind the SIMPLE concept of a FLAT, FAIR, LOW and PRO-BUSINESS Social Security tax for EMPLOYERS and EMPLOYEES. This simple idea can destroy the Wall Street / Republican stranglehold on the economy.
Here’s why the American people would be on fire for this wonky idea...
1. It can be sold as a major, highly popular tax cut for the vast majority of the American people and American businesses.
Cutting Social Security FICA (hereafter, SS Fica) from its current 6.2% to 4.2% would mean that every individual whose gross pay is below $157,000 would get a tax cut. Also, every business whose average gross pay is below $157,000 would get a tax cut.
It looks pretty good at first glance. If you have two incomes in your household, average your incomes and multiple the change by two—there’s your cut (looks really nice, doesn’t it?) If you have ten, or fifty, or a thousand employees in your company, multiple the average income by the number of employees—there’s your business tax cut (wa wa wee wa!). Now that’s change we can believe in! (I couldn’t help myself... sorry!)
For 75% 80% of American workers, SS FICA takes a bigger chunk of their paycheck than Income Tax. For many people, especially those unsure about whether they will receive Social Security down the road, SS FICA is felt to be a persistent, regular burden on their income and standard of living. Of course, many people, including myself, recognize the long-term viability of Social Security and its righteous role in taking care of one of the most economically vulnerable age groups in society. For us, the burden is gladly accepted, but it is still a heavy burden. This simple policy change would bring profound relief from some of that burden, while still reminding us that the reduced burden is one well worth carrying.
2. It would be one of the best ways to create jobs and rev up the economy in the short and long term.
The CBO report of January 2010 (Table 1) notes that a SS FICA rate holiday would have a high value multiplier effect on GDP (1.2x on employer side and .9x on employee side) and job creation (5 to 13 years of full-time employment per million spent for employer side cuts; 3 to 9 years for employee-side cuts) during the following two years. If the employer-side cuts were limited to companies adding jobs (a great idea), the GDP multiplier effect jumps to 1.3x and the job creation effect jumps to 8 to 18 years of full-time employment per million spent. The stimulative effects on GDP and job creation would continue for years to come. Besides Unemployment Insurance, Food Stamps, and Infrastructure Investments, these cuts are the best tools we have for massive economic recovery.
3. It would be a huge boost to almost all companies while exposing the public burden of CEO greed and top-heavy financial corporations in the process.
A few big companies and CEOs will stand opposed until they talk to their CFOs about it. Whatever few top heavy (proportionately large number of super-high salaries) companies oppose it, they would meet fierce resistance from a horde of business owners (of small, mid-size and large corporations) who are just trying to get by and protect their businesses. Entrepreneurs would love it. The idea is ideal for the needs of small and mid-size companies. Heck, it might even help downsize and break up Too Big to Fail companies, since there would be greater tax advantages in going lean and creating new companies.
Also, by making the tax fair, taxing everyone at the same rate, high wage disparities for the very wealthy would have the effect of increasing Social Security revenues. How’s that for jujitsu on Wall Street execs who have been milking our economy dry with their greed?
4. It is a populist winner for a populist moment in history.
There’s an enormous undercurrent of populist anger just starting to be unleashed in this country. If austerity measures take hold (virtually guaranteed given Republican dominance of the structures and frameworks of economic debate, which could be irrevocably set in stone if Obama finalizes his Clintonite move to the middle on this), this undercurrent will turn ugly and violent. Witness London’s very recent and violent riots over tuition rate hikes. Rove and company have cynically tried to co-opt this populism with the Tea Party movement as a front for corporate interests, albeit with mixed results. Democrats need to get out in front of this growing undercurrent and channel it, or else they will continue to be drowned by it.
5. It would end for good the asinine debates over solvency and giving Social Security recipients occasional crumbs of help, instead even allowing an opening for a structural increase in Social Security benefits.
Uncapping Social Security does more to address the long term solvency of Social Security than any benefit cuts could ever do. For this reason, it would be enormously popular with everyone from seniors, worried that the age limit could be hiked up, to 18-40 year olds, wondering if Social Security will be there when they retire. Depending on exactly where the new rate is set, additional revenues could even be used to improve benefits in the short and long term.
6. It is humanitarian relief for a troubled time.
People’s net worth, savings, and retirement accounts have taken huge hits as of late. People need something safe, something secure upon which they can rely. This does that, both by cutting taxes for everyone who really needs it and by shoring up Social Security as permanently rock solid.
Here’s why Republicans will lose this fight and lose very badly if they are dumb enough to make it a real fight...
1. They are pre-committed to the premise. In other words, the door is already open, and a big Democratic foot is planted firmly inside.
Obama’s ill-advised compromise with Senate Republicans may have an unforeseen benefit. Both Republican and Democratic leaders have already attached their names to the idea of a payroll tax holiday. Even in recent alternatives to the original compromise, the SS FICA holiday doesn’t seem to be going away; this, despite the fact that some opportunistic Republicans and some worried Democrats see potential in a temporary SS FICA rate holiday for Republicans to blow up Social Security by using the rate holiday as leverage. Both Republicans and Democrats (notably James Galbraith in his 9/6/2010 article--one chalk full of good ideas BTW) have proposed this SS FICA tax holiday in the past. The only difference would be making it permanent and extending it to employers as well as employees. Both would be hugely popular among most folks in the Republican base.
2. Republicans can’t win a fight against their own branding.
They have defined themselves as the party of tax cuts and deficit reduction. The latter, of course, is laughable given the past ten years. But tax cuts have been their economic strategy, whatever damage is done to the economy and deficits. Republicans will destroy themselves if they run against their own brand. They simply do not have legs to stand up against a serious tax cut for the vast majority of Americans. Their sell-out for the super-wealthy will be uncovered and placed square in the light of massive public scorn if they dare to stand opposed.
3. The purist position about the purpose of the FICA rate and cap doesn’t hold water.
Yes, SS FICA was intended to be tied to the retirement contributions of the person paying into the system. But it is blatantly obvious that this is far more an ideal than a reality in actual practice. Many people already pay far more than they will ever collect, if they collect any Social Security at all. Many people have benefited far more from Social Security than they paid into the system. There is no pure purpose in action. There is disproportionate pay-in and there is contingent need. Really, there’s just one main thing that important—helping folks who retire to have an income net to hold them up if they need it.
4. Super-high wage earners can afford this. Yes they can!
Here’s the breakdown based on the 4.2% number:
I’m pretty darn sure that if someone is making the Gross Pay on the left that such a person could well afford the relatively modest number on the middle right. It could even be pitched, with the help of Buffett and his billionaire buddies, as a model form of sacrifice for the public good and long-term economic stability. Turns out this is even in the best interest of folks on Wall Street. Some of them might even acknowledge it if they would pull their collective, inflated head out of their collective, short-term profit obsessed ass.
Inspire the rich who can be inspired. Shame the rest for the sake of their fellow Americans. A Kennedy-like call to economic patriotism and sacrifice suits the moment. Does it not? Bush was a fraud who told us to spend. Obama could be another Kennedy who calls upon us to sacrifice.
5. It is a serious, structural compromise.
It is serious. It cannot be simply dismissed with a bit of whining, arm folding, and scowling.
It is structural. It is NOT throwing huge sums of money at a system in which even "targeted" funds end up getting sucked up into the coffers of the super-wealthy who reap the disproportionate benefits of disaster and thrive in times of economic chaos. It changes the game because it changes the system. It’s a real New Deal for this New Depression.
It is a genuine compromise, but one made on Democratic structural terms. It gives Republicans something they have campaigned for their whole lives, something specific to which many have already attached their names. It is also in keeping with Obama’s priorities and persona, his governing style of bringing people together for the common good to bring real solutions to real people’s problems.
6. It pays for itself.
Conservatives and Progressives are both ticked off at DC's inability to stop the deficit bleeding. They can't help themselves from throwing massive deficit spending at huge problems.
Because it is structural, the idea pays for itself. Not only that, it stabilizes the economy and strengthens Social Security in the bargain. It is completely and supremely financially responsible. It would be a whirlwind of fresh air amidst the fetid hypocrisy of DC stimulus strategies and backroom deal-making.
Closing Thoughts
Democrats are potentially in control of this whole situation.
Democrats were elected by the American people to run the White House and lead legislation in the Senate for the next two years. They were elected to lead legislation in the House for the next month, and after that lead the loyal Democratic opposition in the House. And what of that ticking clock, waiting to roll back the Bush tax cuts and Estate tax in a seriously progressive direction? That’s a massive Democratic structural advantage, too. All of the real pressure is on Republicans, if Democrats would only be still for a second and consider the situation. Only manufactured pressure under the guise of emergency (thanks, Larry Summers) or faux rage for the poor (thanks, Lawrence O’Donnell) will get the Democrats to undermine their own advantage here.
Obama needs a substantive Economic Legacy to be a truly historic President.
Obama’s appointments to the Supreme Court were very significant. His healthcare legislation, while less than most progressives wanted, was still a landmark moment given the history of healthcare debates and failures. And while dealing with healthcare is essential for dealing with the economy, Obama has yet to have a signature victory and enduring legacy on Economics. Doubtless there have been very good developments with the creation of a Consumer Financial Protection Bureau and the appointment of its champion, Elizabeth Warren, to get it started. But the shadow of Bush and Clinton deregulatory, bubble and burst economics still cloud his Presidency. His all-too-close relationships with the CEOs who brought about global economic disaster also jeopardize his effectiveness and legacy. He has continued to look to these people as experts despite their entrenchment in a self-destructive system of short-term, reactionary thinking. President Obama needs a signature economic idea to define and seal his economic legacy. This could be it.
Democrats need an FDR-caliber policy for an FDR kind of moment.
This is the 1930s, not the 1990s. Clinton presided over a great economy and should be praised for his sacrificial leadership on tax increases, but he also unthinkingly helped sow the seeds of our current disaster with deregulatory policies allowing banks and investment firms to merge into huge behemoths taking enormous risks with taxpayer guaranteed money. Clinton and Bush deregulation was an economic time-bomb waiting to go off. We need to repair the wreckage and defuse the economic boom and bust drama. We need a New Deal caliber idea for this New Deal moment.
Turn this wonky idea loose on the American people and watch everything change.
...
Update x2: My brother, a Master's in Business Finance, a manager in city finance, and a numbers wiz tells me that 4% is probably pretty close. Pa-dow!
I've asked in response for him to give me a more precise calculation of where the lowest, safe flat rate for SS Fica would be if the cap were removed. I'd make the same request of the smart finance, economics and tax folks out there. Can you help us figure out whether this idea has the huge potential I think it does?
Update x3: I've got emails out to HuffPo, TPM, ThinkProgress, Paul Krugman, and William Black asking them to take a look at this. Particularly to the two economists I asked for a simple yes or no about whether this idea is 1) feasible, 2) advisable, or 3) a real Progressive political game-changer. Updates to follow...
Update x4: Prof. William Black, Professor of Economics at UMKC, a major national figure in financial regulations, and a key investigator of the S&L scandals of the 1980s has been kind enough to email me back. Thank you, Professor Black. I'm awaiting his permission to use the full text of the email, but to paraphrase his basic response...
YES, it works financially. It all depends on the political dynamics as to whether it can gain real traction.
(Fat chance, of course, if we start with negotiations from a reactionary mindset. Damn good chance if a movement surfaces and the idea picks up popular support within Progressive, Labor and Business communities. Please send out the news to your friends and associates. Let's think together carefully about whether this could be a huge, game-changing policy winner for this moment in time.)
Update x5: Prof. Black again kindly emailed me back. He may be able to help me get a shorter version published on another site as well. Here's the actual exchange, in case you are interested...
Professor Black,
I'm not an economist, but I was talking with my brother (a Masters in Business Finance and city finance employee) about an idea I had to both 1) uncap Social Security FICA revenues, while simultaneously, 2) creating a lower, flat tax for everyone. Essentially it would restructure the Social Security part of FICA to be funded like the Medicare part of FICA.
I'd like to know if that's 1) feasible, 2) advisable, or even 3) a potentially huge political winner.
My naive instinct tells me it could be #3, but again, I need a real economist to help me here. I wrote up an extended piece with my thoughts, which I will attach.
(snip...)
Kind regards,
Bibschol
His response...
Yes, if you could get the Republicans to approve turning FICA from a highly recessive to a flat tax basis and it could have benefits in multiple areas -- revenue production and reduced inequality.
Best,
Bill Black
UPDATE#6: I've paired down the body of the diary a bit to try to make this argument easier to follow.
UPDATE#7: At the suggestion of 8ackgr0und N015e, I've put together a graphic that shows the UNFAIRNESS of the current SS FICA System, showing the contribution as % of Gross Pay. It's very revealing. Numbers follow the graph.
UPDATE#8: CORRECTED:
A reader noted that Robert Reich was the one who originally advocated the idea of "Tax Jujitsu".
Not to disagree with a leading economist, but for this to work it has to be super simple. I'd highly encourage him and other economists to operate with the KISS principle. Get behind the idea of a FLAT, FAIR, LOW Social Security Tax for Employers and Employees.
That core, simple idea is political dynamite. It's easy to understand and most businesses will think it's Christmas Morning in America. We'll mess it all up if every economist adds his own little cool spin to it. Simplicity is power.
...
(Disclosure: I’m not an economics guy by trade. But I’m going to run with this idea and let smarter people tell me why it can’t work, or, if it can work, how exactly it would work. In light of this, for the basic math I’m using what’s on the table right now, so to speak. Bi-partisan deliberations in the White House and Congress have put forward the idea of a 2% decrease of the current Social Security FICA (SS FICA) rate of 6.2%, giving a "payroll tax holiday" of 4.2% on the employee side. For this thought experiment, I’m going to presume that 4.2%, both on the employee and employer side, might turn out to be in the ballpark of overall feasibility if the SS FICA income cap is removed. That cap, for those who need a refresher, is currently $106,800 and indexed for future inflation via the Consumer Price Index. Medicare is the other component in FICA. Unlike SS FICA, Medicare has no income cap. Employees and employers each pay 1.45% based on the employee's gross pay into the Medicare system. Here the focus is on SS FICA, but the basic idea is changing its funding to mirror the uncapped, low flat rate model of Medicare funding.)