Liberal Economists/Policy Wonks Oppose Payroll Tax

Yes; you read that right. It is not a typo and I did not mean to say "oppose Obama's payroll tax holiday." Liberal interests have pretty much been against the payroll tax for all but a brief period of Social Security's existence. And if you think about it, their central argument is pretty unassailable: Like a flat tax rate, payroll taxes impose a higher burden on those with less. If some workers make 20,000 per year, a 15% flat tax rate is going to impact them far more than 15% for someone who makes 100,000 a year. There is a similar disparity regarding payroll taxes. Anyhoo, I found the history of the whole debate and the arguments in favor of general funding for Social Security and other safety net programs quite fascinating. I think you might as well. What started me on this whole trip was this piece in Salon, wherein I learned this:
Social Security supporters warded off the threat when in 1950 Congress passed amendments that prohibited the use of general revenue and ensured that payroll taxes would be the only mechanism through which Social Security benefits were paid for. There have been times when politicians privately thought about this part of the equation. In 1967, for example, LBJ believed that a Social Security tax increase -- which was tied to a benefit increase -- would help restrain inflation at a time that Congress was refusing to pass a tax surcharge for this purpose. But the White House and Congress were very careful to avoid making this part of public discussions or the explicit reason for any change in the payroll tax rates. Many liberal economists were never comfortable with this agreement. During the 1970s, as the political scientist Eric Patashnik argued in "Putting Trust in the US Budget," Keynesian economists challenged the tax structure. They argued that the payroll tax undercut macroeconomic policies. Payroll tax hikes constituted a regressive way to fund benefits and sometimes went into effect when the government was trying to stimulate the economy. There was another strong push to use general revenue. Generally, their efforts failed and the payroll tax remained outside the debates over stimulating or restraining the economy. When Republicans pushed for income and corporate tax cuts after the 1980s, Social Security taxes continued to rise.
Roughly translated, that's saying Republicans have historically used the payroll tax as cover for their other anti-tax rampages, sticking those with the least with most of the burden. Having read that, I was very interested to subsequently learn that Ezra Klein agrees with many of these criticisms, joining in the "payroll tax is regressive" refrain.
Cutting payroll taxes and replacing them with general fund revenues is appealing in two ways. First, payroll taxes are much more regressive than income taxes. Second, I'm actually fine with breaking the sanctity of Social Security's closed funding loop. A lot of liberals disagree with me on this point, but hear me out. Historically, Social Security has paid for itself through payroll taxes. But because Americans began having fewer kids during the 20th century, it's no longer paying for itself through payroll taxes. So now many in Washington want to cut the program's benefits to bring its spending in line with its trust fund.
As Deaniac points out in that piece, it is the trust fund mechanism itself that most endangers Social Security, because of the reasons Klein mentions, and others. Painting the program as individualized retirement plans and emphasizing the "paid-in" aspect -- instead of the generational social contract it is and the promotion of the general welfare it represents -- opens the door for privatization arguments. It's kind of ironic that the very point used to overcome liberal objections to the trust fund mechanism, emphasizing SS as an earned benefit payout in order to distinguish it from "welfare" or "the dole," has actually played out to endanger the program. If its funding is fixed and limited and its obligations continue to rise (e.g., with the retirement of the Baby Boomer generation, spiraling health care costs, etc.), we eventually arrive at Norquist's wet dream of starving the beast. Opening Social Security up to accept money from the general funds (income taxes), would obviously give the program access to more funding, albeit funding more subject to political vicissitude. But are the slings and arrows of political fortune really such a threat to what is arguably one of the most popular things the U.S. Government has ever done? It's highly unlikely, no matter how much people like Simpson and Bowles whinge about it. We saw the pushback in defense of Social Security, when the attempts to privatize it met a very unyielding brick wall. If you think the hue and cry about the payroll tax has been bad, just wait to get a glimpse of the reaction should a GOP-controlled -- or any -- Congress attempt to actually cut benefits in the name of fiscal responsibility. Let the GOP seriously try to gut SS and see how quickly support from the general fund overtakes benefit cuts as the preferred solution. I'd give it a New York minute. With a majority of Baby Boomers now entering retirement, the program is almost as sacrosanct as it's ever been. Not even today's GOP would be so foolhardy as to attempt to slash the program, especially given that the arguments for using general funds in support of it enjoy a long history. Many proponents of SS/Medicare have argued from the start that infusions from the general fund would be necessary at some point and that a balance of funding mechanisms would be ideal. Those arguments, surrounding the inception of the program and its funding, are what was so fascinating to me:
There was no initial agreement about how to finance Social Security when it was created in 1935, as powerful voices across the political spectrum opposed contributory finance. On the left, many viewed payroll taxes as an unjust burden on low-income workers. Both the CIO and a number of Democrats in Congress advocated Townsend-style pensions, which would be paid for through general revenues rather than payroll taxes. ...Levying payroll taxes on a wide base of the population was a surer way to generate the necessary revenues for the program, while the use of regressive taxes could be justified given the promise of future benefits in return. ...Liberals continued to assail the regressive financing, while conservatives worried that these taxes would bankroll an unchecked expansion of government. ...The political consensus around the Social Security program and its system of finance dates from the 1950 amendments to the Social Security Act that expanded the generosity and coverage of Social Security, thereby reducing reliance on the means-tested OAA program, and reaffirmed that payroll taxes alone would pay for the program. The latter was essential to build support for the program among fiscal conservatives in Congress. Barring general revenues and creating a strict link between contributions paid and benefits received ensured that Social Security would not become a “welfare” program, but was an entitlement that people earned through hard work and their own contributions. In addition to making Social Security a work-based entitlement, many conservatives believed that linking higher benefits to the need to raise payroll taxes would help rein in the program’s expansion. ...For these fiscal conservatives, payroll tax finance was essential for their support of Social Security. Despite the conservative financing structure, liberals also came to embrace contributory finance as a means to attain their social policy goals. Liberal advocates pragmatically saw the importance of payroll tax finance for winning over the conservative southern Democrats in Congress who dominated the revenue-raising committees. ...By the 1950s, however, organized labor became a strong champion of the Social Security program, and an important advocate for its later expansion. According to Martha Derthick, the AFL-CIO continued to prefer some general revenue financing for social insurance programs, but accepted payroll taxes because Congress insisted on having a self-supporting program.
So the movement -- heavily endorsed by FDR -- to present Social Security as an earned benefit derived from its own pay-in revenues was largely successful, until the financial crisis of the 70s hit. In response to SS expansions and the crippling inflation and the broader impact of the recession, the debate about funding Social Security was on again in earnest.
The first strong criticism of contributory finance came not from the right, but from the left. Starting in the late 1960s, economists from the major universities and think tanks criticized Social Security’s design and weighed in with plans of their own. Arguing that Social Security was not a real insurance program, but merely a tax and transfer system, these economists asserted that the taxes were regressive and should therefore be supplemented or replaced by an alternative mode of finance. These views were echoed in a 1969 report of President Johnson’s Committee on Income Maintenance Programs, which criticized social insurance taxes as regressive while funding programs that did little against chronic poverty. Some of the toughest critiques of the program came out of the Brookings Institution, as economists there condemned the payroll tax as a regressive burden on the poor and, to some extent, the middle class. ...Some of the more important interest groups on the Democratic side also began to question payroll tax finance. By the 1970s, unions were voicing concerns about the regressivity of the Social Security tax that had not been heard since the 1930s and 1940s. In 1969, the AFL-CIO proposed relying on general revenues for one-third of program costs, which had been the original preference of SSA officials before the 1950 Amendments foreclosed that possibility. Unions also criticized this mode of finance during debates in the 1970s and early 1980s over how to solve the Social Security trust fund crises. By the early 1980s, they were joined by the AARP in arguing for general revenues to cover a greater share of program costs.
Given the long history of support for the payroll tax among conservatives in Congress, I'm really not sure where the idea that the GOP just looooooves the payroll tax holiday came from.
The fierce debates that ensued over the future of the Social Security program revealed a great deal about the new policy-making climate around social insurance programs. Labor unions, the AARP, former SSA administrators, and some Democrats argued in favor of infusing the Social Security program with general revenues to mitigate the regressive effects of the payroll tax. Yet, the Reagan administration, business groups, and many Republicans opposed any increase in taxes but were especially against using general revenues to bail out the program. Hewing to a longstanding view that payroll taxes restrained the growth in the program, they believed that opening the door to general revenues would result in tax increases later on. Instead, they advocated cuts in Social Security benefits. ...policy-makers adopted a 50– 50 decision rule on the mix of tax increases and benefit cuts...New revenues came from a tax on the Social Security benefits of high-income recipients, an increase in the payroll taxes paid by the self-employed, the introduction of new workers into the system (new employees of the federal government and nonprofit institutions), and the acceleration of previously scheduled payroll tax increases. It is notable that, even at the height of the antitax movement, the Social Security crisis of 1983 was addressed in part with an increase in payroll taxes.
In other words, the GOP has just about always been against taxes, except on labor. And their desire to cut benefits and the fiscal excuses they hide behind to do it are decades-old as well. As is their tendency to use feel-good speak to hide what they're really up to, as with cutting income taxes, but making up the shortfall with payroll taxes. To the extent that the GOP is supportive of the payroll tax cut/holiday, it is important to realize that support is predicated entirely on the reduction's impact on business. As in, it's another tax break for their BFFs, natch. And the deal Obama forged with the GOP only cuts the tax on the worker's side; the employers won't even see a reduction. I think we all know what the analogous Republican proposal might look like.
The three lawmakers offer their measure as an alternative to a massive climate change bill backed by President Barack Obama and now before the House Energy and Commerce Committee. That cap-and-trade legislation would set a national limit on total carbon dioxide emissions and attempt to lower them over time through the sale and trading of carbon "allowances," or credits, among the government, factories, utilities, automakers and other sources of pollution. Inglis and Flake call their measure "tax neutral" because it would reduce payroll taxes by however much revenue the carbon tax raises, with employers and employees splitting the payroll tax cut equally.
Plus ça change, plus c'est la même chose.