Social Security tax cut: A deal breaker

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. 

Dean Baker is co-director of the Center for Economic and
Policy Research
.

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