December 2011, Week 1


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Thu, 1 Dec 2011 21:04:13 -0500
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Oppose Social Security Tax Cut

* Oppose Social Security Tax Cut (Steve Max -email to
* Social Security Payroll Tax Cut -- A Temporary Stimulus
  With Permanent Damage (Social Security Trustee Charles
  Blahous (Fox News))


Oppose Social Security Tax Cut

by Steve Max

Yesterday I received an e-mail from MoveOn summoning me to a
demonstration in support of the Obama Administration's
attempt to fundamentally restructure Social Security and
shift half of its funding into the congressional budget
processes. Of course MoveOn never mentioned Social Security.
They are deceiving their members by saying only that they
support a "small but useful tax cut."

I am sure that you too are being asked to join the campaign
to restructure Social Security and I urge you not to do so.
The argument that this Social Security payroll tax cut needs
to be passed as a stimulus measure is simply fraudulent. The
same amount of stimulus can easily be created, as it has
been in the past, by cutting the income tax for middle
income people, and by making a payment similar to the earned
income tax credit to those with lower incomes.

Instead of directly cutting the income tax, the
Administration proposes to both extend and increase the
Social Security payroll tax cut and repay the money to
Social Security out of general revenue with new money from a
3.25% tax on incomes over one million dollars.

In a phone call yesterday with staff at Senator Schumer's
office, Daniele and I were told that the Democrats are
taking this course because they might get Republican support
for restructuring Social Security but not for cutting the
income tax. Well of course they might. The Republicans sense
that this is their chance to change Social Security from the
self-funding independent program that FDR set up, to one
that can be largely controlled through the budget process by
a majority of either house. That is assuming the Democrats
will continue in the belief that allowing this tax cut to
sunset is actually a tax increase, and will want to keep it
on the books for years to come.

This morning it became clear that the President's
shortsighted opportunism has led the Democrats into yet
another Republican trap. The Republicans have introduced
their own bill to extend the Social Security revenue cut at
its present level for another year but to pay for it by
freezing federal employee salaries and reducing the federal
work force by 10%. By promoting a smaller cut in Social
Security revenue than the Democrats advocate, the
Republicans can now masquerade as defenders of Social
Security, while still supporting a middle class tax cut and
shrinking government. Pretty smart! To continue their
stimulus charade, the Democrats will have to make the type
of compromise of which the Administration has been so fond.

Let us all demand that Obama and Congress end this dangerous

Attached is a piece by Social Security Trustee Charles
Blahous explaining why this proposal is a bad idea.


Social Security Payroll Tax Cut -- A Temporary Stimulus With
Permanent Damage

by Charles  Blahous

Published September 23, 2011


As a former colleague of mine has astutely observed,
sometimes the most consequential policy mistakes occur
because everyone is looking the other way. The President's
latest "jobs" proposal to extend, and expand, cuts in the
Social Security payroll tax is a good example. While nearly
everyone has focused on the debatable efficacy of temporary
payroll tax relief as a stimulus measure, few seem to have
noticed the severe problems it could create for Social
Security itself.

Specifically, the proposal would accelerate a process begun
last December: transforming Social Security from what it
long has been - a benefit earned by worker contributions -
into an income tax based system more akin to welfare.

As a Social Security Trustee, I believe it is critical both
lawmakers and the public have a greater understanding of
this effect before the policy is advanced further.

The payroll tax is Social Security's lifeblood. If it
continues to be significantly cut, then only one of two
things can happen:

Social Security's insolvency is accelerated, or;

Social Security must be financed by general (read: income
tax) revenues.

Either choice undercuts Social Security's future ability to
operate as it has in the past.

So far, the Administration has quietly made choice #2:  to
convert Social Security into a general revenue-financed

The current payroll tax cut, enacted last December, was
accompanied by a provision to funnel roughly $105 billion in
general revenues into the Social Security Trust Funds. This
year's "American Jobs Act" aims to cut payroll taxes by a
further $240 billion next year alone. The proposed bill
would also transfer an offsetting $240 billion in general
revenues into the program to make up for the uncollected
taxes. In total, these proposals would make $345 billion of
general revenue (income tax) commitments just over 2011-12
to support Social Security benefit payments.

This is not a small change; it would significantly alter the
way Social Security is financed.

Consider this: in 2005, President Bush proposed that workers
be permitted to invest part of their Social Security
contributions in personal accounts. The Congressional Budget
Office then projected that this would result in roughly $323
billion in payroll tax revenues being redirected from the
trust funds to personal accounts over the next decade;
critics decried as ruinous what was termed the "transition
cost" of personal accounts.

But just two years of the payroll tax cuts proposed by the
Obama Administration would shift more payroll tax revenue
away from the trust funds than CBO found President Bush's
proposal would over ten. Even more important, unlike
President Bush's proposal, none of this payroll tax cut
would be saved to finance future Social Security benefit
payments. The revenue would be "replaced" by new debt issued
from the general government accounts.

This proposal should be provoking vigorous opposition from
both ends of the political spectrum.

Progressives should oppose it because cutting the payroll
tax directly undermines our ability to finance benefits
(this is why 61 House Democrats wrote the President on July
21 to express firm opposition to a further payroll tax cut

It also is incompatible with the progressive vision for
Social Security's future. Many progressives argue that the
solution to Social Security's shortfall is to raise taxes by
increasing the wage base subject to the payroll tax . But
the case that Social Security might be rescued with
significant future tax increases is fatally undermined if
elected officials conclude that the current payroll tax
already is too high to sustain during a recession.

For conservatives, the primary problem isn't cutting payroll
taxes, it's issuing general revenue transfers to the Social
Security Trust Funds. Essentially, the proposal would
require that income taxes (rather than payroll taxes) must
be raised in the future to redeem Social Security Trust Fund
debt and to pay benefits. This would convert Social Security
into a program that requires higher income taxes to fund. It
also would convert Social Security into something more like
welfare, for which the funding is provided - not by
contributions from all covered workers - but preferentially
from those subject to the income tax.

Choking off Social Security's tax revenue and issuing debt
in its place is a dangerously short-sighted policy that
would swap, at best, a fleeting gain for potentially
devastating long-term consequences. At the very least,
policymakers need to fully understand the stakes, and then
ask themselves - and the public - if it's a trade-off
they're willing to make.

This is a condensed version of an article by Dr. Blahous
previously published by e21. Please click here to view the
full article.

[Charles Blahous, a senior research fellow at the Mercatus
Center at George Mason University, is one of two public
trustees for Social Security and Medicare.]

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