Liberals need not fear Obama's tax deal: Why a payroll tax holiday actually helps support tomorrow's

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Mon Dec-13-10 10:28 PM
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Liberals need not fear Obama's tax deal: Why a payroll tax holiday actually helps support tomorrow's

Edited on Mon Dec-13-10 10:48 PM by ProSense

Liberals need not fear Obama's tax deal: Why a payroll tax holiday actually helps support tomorrow's retirees

By Marshall Auerback and L. Randall Wray

The commentary in the aftermath of President Obama’s announced tax deal with the GOP has been both predictable and, for the most part, misconceived. Leaving aside the issues of income inequality (which we discussed in a previous post), the more predominant critique (especially from the “deficit dove Left”) focuses on the proposed temporary payroll tax cut and the adverse implications that such a cut implies for budget deficits and for Social Security’s longer term “solvency”. Payroll tax cuts are seen by many as part of a bigger plot by Republicans to destroy Social Security's finances or permanently fund it with general revenues rather than allowing the payroll tax to be re-imposed at the end of the tax “holiday”. One staffer in Congress expressed the concern that funding Social Security with general revenues was part of a bigger plan to destroy it by converting Social Security into a welfare program, rather than an earned benefit.

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The truth of the matter is that payroll taxes do not fund the program. Social Security was constructed this way to buttress its political legitimacy against widespread charges of “socialism” in the 1930s, but the reality is that the federal government has been (since the inception of the program and well before) the sole issuer of our currency, and the dollar, which is nothing more than the government’s IOU, is always accepted in payment as such. Government actually spends by crediting bank deposits (and simultaneously crediting the reserves of those banks). For more on this see here.

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And that is why we do not fear a payroll tax holiday—we need to further loosen the fiscal stance. And once Americans get used to that holiday we certainly do hope that they will insist on making it permanent. Goodbye and good riddance to the payroll tax—a poorly designed tax by any measure. Why discourage hiring and employment by imposing a “tax wedge” (as supply-siders call it), increasing the cost of hiring a worker and reducing take-home pay? Further, the tax is regressive—lower rates for those at the top. For the vast majority of Americans, the payroll tax takes far more income than the federal income tax. And why should only wage earners “share the burden” of supporting retirees? Remember, the purpose of the tax is to reduce consumption by income earners, to leave more goods and services for retirees. If that is the case, why exempt the rentier class (that lives on interest, rent, and profits) from this burden? Especially as the wage share has fallen substantially (and is projected to continue to fall for decades—which accounts for much of the future Social Security “shortfall” that intergenerational warriors are so concerned about). If we need to reduce consumption of income earners to leave more for retirees, then we should tax all forms of income.

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So let us have a permanent payroll tax holiday, but meanwhile we need to strengthen our social compact—not by legislating future benefit cuts (which reduce the willingness of today’s workers to join the compact) but rather by legislating more generous retirements!

There's a new twist in the debate.

Edited length.