Raise the Payroll Tax
Yesterday, Congress agreed to extend the payroll tax reductions for another period of time. I have been thinking about this for a while, and I am slowly coming to the conclusion these taxes should be raised. I am still thinking this through so I welcome feedback.
I don't think I have to convince regular readers of this site that I am against government-run and mandated-for-all retirement funds (income via Social Security, medical via Medicare). But if we are going to have such programs, and maintain the pretense that they are insurance programs and not welfare/transfer programs, then the "premiums" we are forced to pay should reflect true costs.
I don't think Medicare premiums are covering anywhere near the actuarial-expected costs of one's future medical care. And while Social Security rates may be set correctly if trust funds were truly held securely, the fact of the matter is that past Social Security premiums that were paid to support future benefits have all been spent by a corrupt Congress. Rates are going to have to be raised to replace this theft.
I don't like raising taxes. I wish these two programs would go away or else be restructured drastically. If they exist, though, there is nothing more dangerous than an incorrect price. Prices help consumers make price-value tradeoffs -- the Keanu Reeves lifetime DVD collection may be a deal at $6.99 but not at $99.99. So charging the wrong prices for these programs not only royally screws up the government's finances, but it also misleads Americans about the value of these programs in comparison to what they pay for them.
Flatland:
Don't raise payroll taxes unless it comes with a path to keeping these programs operating properly. Otherwise there's no point. I'd rather have payroll taxes at zero to force government to have to deal with this issue sooner rather than later.
February 16, 2012, 8:18 amDrTorch:
I think the options should be presented to the public: either we raise taxes to reflect the true cost, or we get rid of the program.
Let people decide w/ the facts on hand.
PS Yes I know it's a pipe dream, but it's MY pipe dream!
February 16, 2012, 8:22 amMark2:
The reason they messed with the payroll tax is because so few people actually pay taxes in this country that it is the only way to give a tax break to everyone is to reduce SSA.
However, I came to your conclusion awhile ago. I understand doing it for one year, but to continue to underfund SSA when we have been hearing about how it is going under for the past 30 years is unconscionable. In fact I was really really annoyed around Christmas when Boehner was running around pretending to stop government again, not because he wanted to make real cuts, but he wanted a really bad program (the SSA tax reduction) extended 1 year instead of 2 months. How dumb is this guy. Why have the T-Party folks in congress allowed him to remain speaker, when he is the worst of RINO's. I wish there were a GOP challenge to his seat.
February 16, 2012, 8:31 amRealityCheck:
We can never charge people the true cost because that would be viewed as Not Fair.
February 16, 2012, 8:32 amBill S:
Depends upon what you mean by "taxes should be raised."
Are you talking about a higher percentage from dollar zero, or raising the limits on which the taxes are collected?
Far too many people don't pay Income Taxes which clearly is not a real price. The payroll taxes are broad based so I would argue that it's a good idea to raise the rate from dollar zero of income. This brings more people into the "paying for the government they voted for" than the current system which seems to sell taxes as something other people pay, usually called "The Rich".
Of course, changing the programs is the best solution, but that's unlikely to occur.
Frankly, I think there are far too many people who do believe that you can get something for nothing. They believe the government must be right, and as changing it is difficult, don't worry, be happy.
February 16, 2012, 9:12 amCT_Yankee:
So you think there is even a slim chance that money from a new or increased tax would go towards whatever cause was claimed when it was enacted? I would expect any "extra" new money to be used as a "down payment" on a new, broader program, that would leave the government further in debt.
On a small scale it would go like this: No politician would take a $1,000 windfall to pay off the city's car loan, and then be debt free. It will always be used to get a foot in the door on a brand new luxury car. Instead of being almost paid off (owing less than $1,000), the city would place the $1,000 as a down payment on the $73,000 vehicle, leaving the taxpayers $72,000 in the whole.
On a large scale, it would look like anything else the government touched, shoddy results on a champagne budget, trillions wasted, and a new and greater tax hike would now be required, get diverted again, and the cycle would continue.
February 16, 2012, 9:37 amfilbert:
Eliminate the sham/shell game which is the "payroll tax." Call it what it is: an income tax surcharge on the poorest 50-75% of Americans. (That will go over well, I'm sure.)
But the bonus of this approach is that it will end the BS line about Social Security being any kind of "insurance" or "paid benefit." It isn't. It's a welfare program.
February 16, 2012, 9:48 amruralcounsel:
One problem is that as a snapshot in time, the costs of the program (benefits) aren't going to the the folks who are paying those costs (the payroll taxes). It's mostly a generational transfer tax.
Now, if they were willing to run it like a Health Savings Account (HSA)? And account for every single dollar each person pays in, and a reasonable rate of return, and match that up with the dollars going out. You know, the sort of thing that Fidelity and Vanguard and a host of other mutual fund investment firms do every day? And allow for unused funds to be passed to kith and kin?
But we know that wouldn't fly politically. The Left only supports these programs because they know it is a means for redistributing wealth. They would hate the HSA idea that puts accountability for spending the money in the individuals hands and eliminates the need for a huge bureaucracy. The Right goes along because...because...? Why does the Right go along? I suppose they delude themselves into thinking of them as some wierd form of HSA. But they never were very good at precise analytical thought.
February 16, 2012, 9:51 amBrad Warbiany:
You know as well as anyone that money is fungible. They can carve out a specific line item, but as we've seen with the "trust fund", there's nothing to stop money from one purpose being diverted to be used for another.
If you raise payroll taxes now, you'll keep contributing to the "trust fund"; which is to say that you'll keep funding the REST of general spending through the payroll tax. I'd rather we tell Washington that they actually have to pay back the "trust fund" out of general revenues (i.e. new taxes elsewhere, not just "cashing in bonds") so people can see what a lie it was.
February 16, 2012, 9:57 ampino:
I am still thinking this through so I welcome feedback.
I think they've decided that lowering taxes on a program that's already so underfunded can't hurt 'em. Further, they know that SS is wildly popular so that in time, we'll have to continue to fix it. And that "fix" will come from other revenue; revenue that isn't obtained from low income earners.
February 16, 2012, 10:02 amdelurking:
You wrote:
"And while Social Security rates may be set correctly if trust funds were truly held securely,"
I don't think it is meaningful to say this. In a government that controls fiat money, there is no way to hold the trust fund securely. If they keep it in cash, that is the same as just burning the cash and printing more later. If they area allowed to invest it in anything but gov't bonds, there is just way too much incentive for corruption.
February 16, 2012, 10:10 amTim Briggs:
Don't raise taxes. Especially payroll taxes. Instead, the programs should be scaled back....slowly.
Having said this, we all have become addicts. We have lived so long with these programs that it might kill us if we suddendly withdraw. That is why it is so important to repeal ObamaCare before its roots get too deeply imbeded.
The amazing thing about the Egyptian paramids is not the paramids themselves, but the continuity and resolve it took to complete the project.
Today our knee-jerk politics will likely prevent the continuity and resolve it will take to fix things. I see a train wreck that is certain to happen.
Sorry I can't be more optomistic.
February 16, 2012, 10:23 amjohnson:
I'd add to that proposal eliminating the employer contribution and putting it all on the employee (where it probably falls anyway, or at least did before the recession). If people realized that they were paying almost 15% of their income for these programs, they'd get a lot less popular for all but the lowest income workers.
The downside to this proposal is that when people realized what they've been paying, they'd probably just go into eat the rich mode and try to get rid of even the payroll taxes on 50% of the country.
February 16, 2012, 10:23 amMatt:
Social Security is not an insurance program and it was never intended to be an insurance program. That it was sold to the public as an insurance program was a fraud. The actual legislation has always been a pay as you go program where current benifits were payed by the taxes from current workers. The program as it was created, the trust fund was never intended to be large, it was just a way of mananging cash flow short term. The problem that SS runs into is a demographic issue. When the program was created there were more than 10 workers for every benificiary and the program worked fine with low rates. The problem is that as the baby boomers retire the ratio of current workers to SS beneficiaries will approach 1.
At that point, no tax rate will be enough.
If we could fix the demographics, the system will be fine with lower payroll tax rates than current.
February 16, 2012, 10:39 amGrant:
One of the big problems with government/command economies is that it cannot accurately determine price. This is a core component of Austrian theory. So, the government cannot ever, no matter how smart they are, determine what the cost of a program is from a profit-loss perspective. Market incentives and behaviors do not apply.
So, that being said, raising taxes to keep SS solvent longer, if it works at all, does not fix the problem, it merely delays the inevitable and kicks the can down the road a bit further.
Because of this, I'm a fan of them continuing to cut taxes. First, if the results of an initial wave of theft are not to our liking, I see no reason to allow a second or third wave of it. Second, the faster this program implodes, the less painful it will be to dig out of the hole. Since we are currently looking at a lot of pain from a century of economic mismanagement on the part of the Fed, I'd say it's best to figure out how to get back on track sooner rather than later.
More theft is never the answer, and if you reach a conclusion where it seems to be, it might be best to recheck the process.
February 16, 2012, 10:49 amBrian Donohue:
The SS Trust fund has $2 trillionish. At some point, income tax payers are gonna have to pay this. This brings that forward a bit.
At the high end, a couple that each makes $100K nets $4K a year. Not chump change.
Trust fund babies and others who live off of investment income (this has been in the news lately) get nada.
Also, importantly, most public sector workers- nada.
We have to redraw the battle lines- not 99% vs. 1%, but "private sector taxpayers" vs. "public sector unions". From this perspective, it's a no-brainier.
February 16, 2012, 11:01 amGil:
This is one of those "What flavor gas should we use in our concentration camps?" questions.
There's no right answer, because the premise assumes a huge crime relative to the difference in policy under discussion.
The question, I guess, is what policies will lead to the quickest and least painful end to these programs.
If it's trying to price the premiums "correctly" then I guess we should try to do that. If it's eliminating the extra taxes, and admiting that these are welfare programs for the elderly, then we should do that.
I suspect that other factors will swamp the effects of these policy distinctions, though.
February 16, 2012, 11:52 amrox_publius:
i refuse to accept your premise that the payroll tax is somehow different than other taxes simply because we nominally say that the money is applied to social security. the trust fund is fictional. revenues are revenues and taxes are taxes. A is A. you either are for or against cutting taxes, temporarily or permanently. the discussion might be whether the incentive structure of a payroll tax is more or less helpful or harmful than, say the inheritance or capital gains taxes. that is open for debate - but i refuse to encourage this "trust fund" fiction.
February 16, 2012, 12:05 pmW. C. Taqiyya:
It seems very clear to me that the root of the problem regarding taxes and paying for our all-inclusive Government programs stems from the fact that we citizens are permitted to retain some portion of our paychecks. We have way too much freedom and the Government has been allowing us to spend lots of money in a very reckless and unaccountable manner. For example, when was the last time you filed a certified audit of your personal expenditures? Has your spending been consistent with and supportive of our national policy priorities or do you leave the children behind? I thought so. Irresponsible Americans are the problem and its high time we all just give our entire paycheck to the Government where it can be equitably spent in a responsible manner for the good of all. Then, to say nothing of the savings in paperwork alone, everything we need will be provided to us and nobody will complain.
February 16, 2012, 12:13 pmDon:
Warren,
I've been thinking this over for a while now (since they did the first "payroll tax cuts") and here's my thoughts.
First, like you I think, I believe the base for ALL taxes should be $0 and it should rise based on what I actually NEED done for me (e.g. basic military organization and preparedness, basic immigration and foreign diplomacy, so those all military supplies never get used, etc.).
Second I believe ALL taxes on income are perverse. Taxes (at least Federal taxes) should always be on spending for non-life sustaining items (although, I'd also argue that none of us should EVER see a federal tax unless our business is located on Federal Property or we're doing business with/through the Federal Government; all else should flow through the States).
Now, down to Pay Roll taxes.
First, they are now calling it a "Tax", so the pretense of Social Security/Medicare-as-Insurance is busted. We don't need to pretend about that any longer.
Second, as anybody paying attention is well aware, pols are keen on things where you can "provide" for people using "other" people's money, so cutting out the employee portion of the "Pay Roll Tax" makes since from a political point of view.
What they SHOULD do is drop the employer portion and put then entire 13-some percent tax on the employee. But of course, it would be even more appropriate if they also increased this percentage to the actual level of spending required (probably more like 15% now, and likely moving toward 25% in the next couple of decades). This would immediately cause people to scream bloody murder and begin to see how wasteful the Feds have been with their money. Frogs in the pot!
What they WILL do, however, is continue dropping the tax to $0 on the employee's side (or close to it), eventually raising it on the employer's side (to make up their "revenue" losses), making the employers appear to be the bad guys because they will be unable to give raises (and many will likely drop people's pay) to cover this cost. People will be mad at their employers, and, if everything runs true to form, we will see people protesting their drop in pay and sky rocketing unemployment because of all the businesses cutting payroll to fix their budgets. Likely this will lead to "government bail outs" and laws attempting to force employers to "stop lying" about their costs and when it's all said and done, we'll probably wind up with French-like laws that guarantee pay raises, holidays, etc.
At least, that's where I see it going, I could be wrong.
Sorry for the long post, just wanted to fully develop the ideas.
February 16, 2012, 12:18 pmMark:
We do need Truth in Taxation, but we need an overall tax reform even more.
Here is my proposal, simple and effective:
Gross Income Tax: 15.3% This tax is placed on all gross income, no deductions, not even losses. A 15.3% gross income tax would raise about $1.4 trillion.
Net Income Tax: 10% One $150-250,000 deduction. You can write off losses from business, partnerships. No other deductions allowed. Total Revenues: $200 billion
National Value Added Tax: 8% This replaces the ineffective and loophole ridden corporate income tax. Total Revenues: $950 billion
Eliminate Corporate Income Tax
Eliminate the change in basis that is the Estate Tax. That is, any inherited asset would retain its original basis and if the inherited asset is sold, you would pay taxes based on its original purchase price.
With all the other government revenue sources, total revenues would be about $2.7 trillion, or about 18.1% of GDP. This is the historical average for revenues.
In addition, there would be a mandatory 2.9% pension contribution. Half of this amount could be placed into a classic 401(k) account. The other half would be invested in a government bond fund in the contributors name that would mature at various times after retirement.
This plan offers tremendous benefits. It lowers the top marginal rate from 35+% to 25.3% even though it enhances government revenues. For most people it would be revenue neutral, with most of the increases coming from the National Sales Tax. But since corporations and businesses pay their taxes by charging higher prices, eliminating these taxes and replacing them with a sales tax probably would actually create efficiencies (no more inefficient activities because of loopholes and simplified accounting) the dynamic effect might even lower prices of goods and services.
Social Security and Medicare payroll taxes are replaced with general taxes, like they really are. In addition, the mandatory savings create wealth for individuals. Some formula probably would need to be created for calculating benefits of social security taxes already paid in, but these amounts, combined with the new private accounts should make most people much better off.
February 16, 2012, 12:20 pmDon:
Mark: "Gross Income Tax: 15.3% This tax is placed on all gross income, no deductions, not even losses. "
Non starter, dude! Groceries have a average mark up of about 1%, and during certain times of year run at a loss (think fresh produce during a bumper season). This would either put every grocery store in the country out of business over night, or cause an overnight 5-10% rise in food prices.
At the same time, many farmers run on similar margins and frequently will go 2-3 years without profit before they get one big-bumper year that makes up the difference (of course, subsidies make up some of that difference, but this cycle still pervades agriculture).
So, you're suggestion would destroy both the production of food stuffs, and the distribution of them.
Like I said, non-starter.
February 16, 2012, 12:28 pmDale:
Over the years I’ve given some thought to Social Security and I’ve come to the conclusion that it could never be anything else other than pay as you go. My reasoning is that the Federal Government cannot save money, because it’s the one who prints the money, all it can do is take money out of circulation. The only other option is to invest it either in its self or in the privet market. If it invests in its self it is just another tax, or if it invests in the privet market that would put the government in the position of competing directly against the privet sector. Also, if the government is the one deciding on where to invest Social Security money in the privet sector the opportunities for corruption would be endless.
This is something that I only partially, if at all, understand. Forget the money; we cannot have one retired person for every two or three people still working. Especially if all of us old fart’s intend to live in condos and drive motorhomes endlessly around the country. Money can only be a reflection of this physical reality. I would welcome anyone explaining to me where I’ve gone wrong.
I have of course read through the comments and many of you seem to be saying the same thing.
February 16, 2012, 12:52 pmMark2:
We had the highway trust fund robbed a year or two ago, and now we are hearing sobs from "Low Tax, Balance the Budget" Boehner, who wants to create a new highway trust fund to pay for right wing pork. the funds would come out of New drilling land leases (yeah right, that would cover 10% of the bill), except for 1 or 2 highways that truly cross state lines, most of these highways should be fixed up by states, and state taxes rather than have a stupid transfer tax.
Very similar to what is happening in the SSa raid.
February 16, 2012, 12:56 pmMatt:
Mark2,
There is no SSa raid. Raiding the SS trust fund is impossible. It is imposible for the simple reason that it has NEVER had any money in it that could be raided.
By the original law that created SS in the 1930s (don't rember the exact year) every dollar that SSa takes in that is in excess of what is needed to pay current benifits is invested in US Tresury Bonds. When SSa or anyone else buys a Tresury Bond, the money goes into the general fund. The bond is an IOU.
In the beggining the trust fund was only used to balance cash flow varriation from one year to the next and was always small relative to today.
So what happend?
In the late 70s or early 80s the baby boomers started to notice the demografic trend I noted above. The realized that there wouldn't be enough workers to pay for their retirments. Some of them went to congress and demanded a fix.
What congress did is raise the payrol tax rates well above what was needed to cover current benifits, causing the build up of a large balance in the trust fund.
Why did they do this? Because by law SSa can't pay benifits totalling more than current revenues + the trust fund. This was a fraud from the beginning. The congressmen that passed this knew full well that there wouldn't be any money to redeam the bonds when they were needed. However the existance of the nominal trust fund would allow SSa to borrow money at the time it was needed to fund the benifits prommised to the baby boomers.
The SSA Trust fund is and always has been a fraud.
February 16, 2012, 3:15 pmme:
My argument would be that payroll taxes are largely irrelevant. The US tax code is so broken at so many levels that adjusting any single tax, even if it happened to adjust it to something close to its "right" level (there's an entire separate debate here) would not fix a thing.
Now, set a 20% tax rate on all income and enforce it unilaterally, and you'd have some real change.
February 16, 2012, 6:14 pmJohn Moore:
"Payroll taxes" at least have the characteristic of being flat rather than progressive. In fact, some of it is capped. So raise the payroll taxes.
But also, get rid of automatic deductions. If everyone had to write a check or two every month for taxes, the political scene would be really different.
February 16, 2012, 7:20 pmT J Sawyer:
Social Security is now dead. I said it on the day they voted the cut in taxes from 6.2% to 4.2% There is no way that any congress is going to vote to restore that cut.
It may have been actually been killed much earlier during the Nixon administration when Congress, weary of having to periodically pass an increase in benefits decided to index them. I love asking my son, nieces and nephews, "Did you have a pretty good year financially last year? I noticed that you gave me a 3.4% increase in January? How can you afford to do that?"
Fixing social security is actually pretty simple: Restore the tax rate to 6.2% (Non-starter for any congressman.) Raise the retirement age a bit (Non-starter for any congressman.) Drop indexing of benefits (Non-starter for any congressman.) Legalize immigrants who are currently here so as to kill the cash economy and put all the income on the books. (non-starter for any Republican.) Social Security will then run fine for as many years as anyone can project with reasonable accuracy (no, that is not fifty years!)
February 16, 2012, 7:58 pmMark:
"Non starter, dude! "
You realize that everyone ALREADY pays this 15.3% gross income tax, right? It is your "Social Security" and "Medicare" taxes. The "GROSS INCOME TAX" essentially calls them what they are, spreads the tax to all income, and calls it a day. Pretty simple. You are paid by your employer, you are given a dividend, you earn a capital gain. Pay 15.3%. Very little accounting needed. Very limited tax forms required. Your employer would essentially withhold these amounts immediately just as they do not. 99% of the people in the United States would not even know the difference.
Then with the "Net Income Tax" I propose, most people would not be impacted. Most middle class people will not pay an "income tax" but would pay these taxes through the sales tax. But, this moves the price of taxation from production, investing, and work to spending and consumption. You can essentially control what you pay in taxes by living frugally.
Lastly, corporations go to the ends of the earth to avoid the 35% corporate income tax. In reality, the corporate tax is structured as a excise tax, so a national sales tax is just a reformation of the existing model. But, corporations will not longer have the ability to avoid them by transferring profits from the US to Ireland, then Holland and then the Caymans like Google does. OTher corporations will not be able to hire lobbyist to avoid taxation. And, they will no longer have to employ inefficient tax dodges. Most or all of the 8% is already priced into a products we buy in the form of corporate income tax, but with an upfront sales tax these efficiencies might then be represented in reduced prices. Businesses and corporations will not longer need armies of attorneys and accountants to manage the corporate tax bill.
And, the other benefit of a national sales tax is that there is a lot of under the table money in the United States that is not taxes. But, using a sales tax, even members of the underground economy will be "taxed" when they buy things. And, sales taxes raise money from visitors, immigrants both legal and illegal, from their transactions.
This is the way to go. Raises revenues but creates more incentives to invest and work. This is true tax reform and we need it now.
February 17, 2012, 2:20 amScott:
I'm young enough that two things are true for me:
A) No minor fixes are going to do anything to save the program for me. By the time I retire, even the Treasury bill trust fund will be exhausted, at least according to that ultra-right-wing think tank known as the Congressional Budget Office. My benefits aren't going to be there when I retire anyway, even with commenter TJ Sawyer's fixes.
B) If there is a major reform with Social Security, such as switching to the Chilean model, my retirement is far enough in the future that I have time to save up enough in a personal retirement account to live comfortably.
Taken together, this means that my best hope is that the rest of the country wakes up, realizes Social Security is unsustainable, and switches to a program that is sustainable, as soon as possible. The biggest argument against reforming Social Security is "nothing's wrong, we have a trust fund!" Therefore, the larger SSA's annual deficit, the faster that trust fund disappears, and the sooner we might see real reform. I say we make the payroll tax cut permanent.
As an aside to Warren, if you really want appropriate prices as soon as possible, you should see that this isn't going to happen under the current Social Security scheme. The Chilean model isn't perfect on this measure either, but it's a lot better. The best way to get appropriate prices as soon as possible is to do whatever is necessary to achieve real Social Security reform, which I suggest includes keeping the payroll tax cut.
February 17, 2012, 4:43 amMark2:
The trust fund is essentially gone. What we really should do is base the outlays directly on the inputs. Maybe do it a year off. If we collect $10 in SSA inputs in 2010, then in 2011 we distribute $10, if we collect $9 in 2011, in 2012 we distribute $9 - Or since retired folks need the annuity base the fixed annuity on the inputs from the prior year. We collected $10 last year and 4 people retired, so you each get $2.50 for the next 30 years (adjusted for inflation). That would also, for the most part, solve the problem. We might go into some debt, but not "owe" trillions in future liability.
February 17, 2012, 8:24 amRoger:
I recommend choice. Just as we have options now on when we take SS that reduce the amount we collect, we should have choices on how much we pay in.
For example, the current contribution rate would require later retirement age. A higher rate than today could lead to comparatively earlier retirement ages. People can then choose. Those nearer retirement would of course choose the higher rate. The young would have time to prepare. The rest is all actuarial.
In summary, those desiring early retirement should have it and pay for it. Those desiring lower taxes can have it too. Choice.
February 17, 2012, 8:39 amMark2:
As someone mentioned before some minor age tweeks can help a lot. When the SSA was increased from 65 to 67, they never raised the lower bound, which is still at 62. You would not believe how many people retire at 62 just because. If they raised the upper bound just one more year to 68 and the lower bound from 62 - 64 - it would not only have people taking benefits for fewer years, but also encourage people to work an additional 2 years. This would have the effect of increasing SSA revenues about 4.9% and decreasing expenditure by about 8%. It would solve the whole issue if we kept payroll taxes at 6.2% x 2
February 17, 2012, 9:09 amSteve S:
My problem with raising taxes so these social programs pay for themselves, is that we've already traveled down this road. The feds 'fixed' social security in the 80's so that it would pay for itself, and put aside excess 'contributions' for times when expenditures exceeded income. In reality, the feds simply spent all that money. There's no lock box. There are no excess funds. In true Dumb and Dumber fashion, all the SSA has is a suitcase full of IOU's from the federal government.
I suspect any new attempt by the feds to 'fix' SS again, would result in nothing more than another suitcase, and more IOU's.
February 17, 2012, 9:41 amBillford:
Agreed. When taxes are not high enough to cover government spending, someone who wants lower taxes is ceratinly justified in taking two positions in the following order: 1) Spending and taxes should be decreased; but if not, then 2) taxes should be increased to pay for the spending.
February 24, 2012, 8:34 am