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Yes Social Security Adds To The Deficit

Discussion in 'Economics, Business, and Taxes' started by Joe Economist, Apr 9, 2014.

  1. Joe Economist

    Joe Economist Council Member

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    Both Republicans and Democrats have agreed that Social Security has not contributed to the federal budget deficit. The Democrats have been more vocal about the claim. But both parties buy into the concept.

    The politicians live in a la-la land of denial where taxes have no unintended consequences. In their world, a system like Social Security can quietly collect nearly a trillion dollars of taxes and the rest of the economy is complete unaffected. No one works less. No one hires fewer people. Those behavioral responses to taxes are difficult to measure. So we make the assumption that they don't exist.

    Let’s be very clear here. Social Security is a signficant contributor to the budget deficit today. Taxes increase the cost of business, and constrict economic growth. Given that economic activity is what pays for the government, anything that reduces growth increases the deficit. The Congressional Budget Office has put some numbers behind this theory. It projected that cutting payroll taxes from 12.4% to 10.4% during the tax-holiday would create 2.5 to 7 million jobs. If they are correct a small cut in FICA taxes will create millions of jobs and billions of dollars of income taxes.

    One of the more vocal member of Senate on the issue of Social Security, Senator Sanders, is proposing a new tax on the high income earners to stablize Social Security into the future. One has to ask, if these people have more capacity to pay taxes, why should those taxes be raised as payroll taxes when these taxes could be raised as income taxes to pay down the deficit.

    The reality is that increasing one tax make it more difficult for the government to raise a separate one. As a tax, payroll taxes have to compete against income taxes within the wage tax base. In this competition, they are like two straws drinking from the same soda. What one takes, the other cannot. Every dollar that is collected in the form of FICA is a dollar that the government cannot collect in income taxes. Absent payroll taxes, our income taxes would be much higher, and the deficit much lower.

    The only way that statement can be false is if the willingness to pay taxes is endless. Common sense rejects that idea. Empirical data rejects that idea. Economic studies reject that idea. Kurt Hauser will at some point win the Nobel Peace Prize rejecting that idea. Washington is the only place on earth where payroll taxes aren’t taxes.

    Washington will tell you that pay roll taxes are contributions to a retirement system. The problem is that Washington hasn’t noticed is that fewer people believe that they will get their money back. According to ABC/Washington Post polls, more than 80% of Americans think that Social Security will go into crisis without reform. As the return falls, people think of payroll taxes as just another tax.
     
    Last edited: Apr 9, 2014
  2. Woolleybugger

    Woolleybugger Mayor

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    Your comments assume that taxes affect behavior at these levels. History proves you wrong and common sense makes it easy to understand. Say I had a salary of 1 million dollars and my taxable income for the SS tax was left alone. I would neither be motivated or demotivated by this tax, it means nothing to me and is not even remotely part of the reason I work for 1 million dollars a year. Raise it to another amount and I still willingly accept the horrors of making 1 million a year. At no time would I ever think about working less or quitting my job because of the SS tax. This is true all the way up to one billion a year. Tax policy simply has nothing to do with how people at this scale think and behave.

    Now some may say that they do not like the tax or think the government is too big and so on but does anyone really believe these same people would quit because of this belief system? And if they did, someone else would take their job willingly. I have been around people who have made giant windfall incomes over the years. Sure they gripe about taxes but not a single one of them ever considered stopping or quitting because of the tax rate.

    Now let's get on to the deficit. The deficit is simply the delta between what the government spends and what the government is willing to tax. That delta results in borrowing from the very same people who refused to tax themselves for that spending. These people prefer to have lower taxes, all the government money can buy and gain interest for their selfish interests. The interest rate paid is simply money that is created out of thin air which is distributed to investors in T-Bills. It is a handy way to increase the money supply and provide a safe haven for risk averse investors. The world demands and expects T-Bills to be auctioned. If the government ran a surplus, that surplus would end the sale of T-Bills theoretically especially long term notes. What you would get is endless auctions of short term notes to fund cash negative months for the federal government. Since inflows are lumpy, the amount of short term notes might fluctuate a bit but it will never be eliminated will it?

    The last thing I want to say is that the government is the issuer of money. There is no limit to how much money the government and it's institutions via the Fed can create. The only brake upon it is runaway inflation. There is no runaway inflation and has not been any since the early days of OPEC. The way our money creation is going today, new money is flowing into smaller and smaller bands of people who do NOT spend it. If the money actually went to the masses, there might be an argument that too much money and too few goods will create inflation. But do you really think the world is running out of capacity to make things? In fact, the world has billions of potential consumers to go before anyone can say that too much money is chasing too few goods.
     
  3. Joe Economist

    Joe Economist Council Member

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    What history are you talking about? There is very little in the way of research on the impact of payroll taxes on upper income workers. So if you have some research I would be interested in seeing it. As for common sense, what you have said runs counter to the teachings of introductory economics. So you should write a book and test out how taxes affect someone making a million dollars or more.
     
  4. Supposn

    Supposn Council Member

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    Joe Economist, to the extent that the FICA payroll taxes revenues earmarked for Medicare, Social Security retirement and long-term disability are exceeded by our government’s spending for such purposes, the excess spending is funded by federal general taxes and/or borrowing.

    Within any year that occurs, it is reasonable to state that those excess federal expenditures adds to the federal annual deficit.

    Within any year that occurs, it is reasonable to state that those excess federal expenditures directly adds to the federal deficit may be justified by other than accounting criteria.

    Tax revenues are increased due to tax collection enforcement. To the extent that the consequences of increasing our spending for tax enforcement would reduce budget's deficit or the reducing such spending increases our deficit, such expenditures are fully justified. We should not risk the consequences of severely under-funding national defense or the social and economic detriments due to under-funding Social Security retirement or Medicare.

    I’m a proponent of retaining the full benefits of Medicare and Social Security retirement by increasing the funding those programs without increasing the tax burdens upon our working poor and that recognizes its indirect economic benefits to all rather than to only wage and salary earners.

    Refer to the thread entitled “FICA’s our most regressive federal tax”, (i.e.http://www.politicaljack.com/threads/ficas-our-most-regressive-federal-tax.78696/) for a proposed policy that would start remedying FICA’s revenue shortfall, reducing the regressive character of our FICA payroll tax, retaining the Social Security’s and Medicare’s full benefits and reducing the shortfall of their funding.

    Respectfully, Supposn
     
    Last edited: Jan 25, 2015

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