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Will Social Security pay for tax cuts?

Greenspan said he supports President Bush's proposal that the tax cuts approved in 2001 and 2003 be made permanent - but only if the resulting budget deficits are narrowed by curtailing spending on entitlement programs, notably Social Security.
Register-Guard
February 23, 2004


Robin Hood in reverse: Will Social Security pay for tax cuts?
A Register-Guard Editorial

Poor people pay Social Security taxes, but little or no federal income tax. Rich people pay income taxes, but most of their income is not subject to the Social Security payroll tax.

The interests of the two groups are on a collision course. Trillions of dollars are at stake, as is the adequacy of future Social Security benefits. Yet only the interests of income-tax payers are being loudly articulated, while Social Security-tax payers' interests are ignored.

Federal Reserve Chairman Alan Greenspan provided the clearest glimpse of the conflict in recent testimony to the Senate Budget Committee. Greenspan said he supports President Bush's proposal that the tax cuts approved in 2001 and 2003 be made permanent - but only if the resulting budget deficits are narrowed by curtailing spending on entitlement programs, notably Social Security.

The implications are staggering: The tax cuts can be made permanent only at the expense of Social Security. This would entail a shift of wealth of historic proportions.

With its graduated rates and widely available deductions, the federal income tax is progressive - people with high incomes pay more. Indeed, Americans on the lowest half of the income-tax scale pay less than 5 percent of the tax, while the richest 5 percent pay more than half. The structure all but ensures that income tax cuts will favor the wealthy.

By the time they are fully implemented in 2010, the richest 1 percent of taxpayers will be receiving more than half of the benefits of the tax cuts. But then, they're the ones who pay the most in income taxes.

Social Security taxes are structured in almost the opposite fashion. Workers pay 6.2 percent of their income in Social Security taxes from the very first dollar they make, plus an additional 1.45 percent for Medicare. Their employers pay the same amount. Self-employed people pay a combined worker-employer rate of 15.3 percent. Income greater than $87,000, however, is not subject to the Social Security payroll tax. Only the 1.45 percent Medicare tax applies to income in excess of that amount.

There was no serious discussion of Social Security tax cuts when Congress debated President Bush's tax cuts, even though such a cut would have benefited employers and workers alike, with the greatest benefits flowing to the poor and middle class. Such cuts were off the table because it is understood that Social Security has unfunded liabilities, and must accumulate reserves to cover the benefits of retiring members of the baby boom generation. The current value of those liabilities over the next 75 years is estimated to be $3.7 trillion.

Yet tax cuts appear to be perfectly acceptable when they produce deficits in the parts of the federal budget that are supported by income taxes. The tax cuts are expected to reduce federal income by $1.7 trillion over the next decade - or $2 trillion, if the interest on money borrowed to cover the deficit in included. In current dollars, the 75-year cost of the tax cuts is estimated to be $8.7 trillion. The long-term price tag of the tax cuts is more than double the size of the Social Security shortfall.

And now Greenspan is talking about scaling back Social Security benefits to minimize the fiscal imbalance created by the tax cuts. Social Security - which provides income insurance for 150 million Americans and retirement benefits for 45 million more, and which is financed by taxes that fall entirely on incomes at or below the middle class level - would be curtailed to help pay for tax cuts that flow to people at the apex of the economic pyramid.

This is Robin Hood in reverse.

Opponents of President Bush's proposal to make the tax cuts permanent are accused of calling for a tax increase. The president, however, is fortunate that his critics' ambitions are so modest.

A bold response to Bush's plan for permanent tax cuts would be a call to rescind at least part of the income tax cuts and use the revenue to stabilize Social Security, or even finance a reduction in the Social Security tax rate. Perhaps the people who pay Social Security taxes and rely on the program's benefits will demand that their leaders begin to defend their interests.