Tuesday, January 14, 2003

A thought on Tim Noah's ongoing coverage of the are-the-poor-relatively-undertaxed question and associated problems about how to interpret the payroll tax.

It seems to me that Larry Lindsey's argument,

The way Social Security is set up, is when I pay another
dollar for Social Security tax, I buy an explicit, legislated
amount of benefits. … I pay the money in, I get the money
out, and that's all there is to it. Now, as a first pass, therefore,
it wouldn't make sense to me to call the OASDI contribution a
tax, even though we all do. … I can't see a logical reason why
we should include the Social Security OASDI portion of that,
in its entirety, as a tax. I think we should write our [distribution]
tables without it there. It is purely a private good.

(which Noah characterizes as "Lindsey invited the audience to think of the Social Security portion of the payroll tax as not being a tax at all, but rather something like a Christmas Club") is a very problematic one for Social Security privatizers. In perpetuating the myth that the "OASDI contribution" is something other than a tax, and Social Security something other than a redistributive spending program Lindsey risks making privatization look superfluous. After all, if Social Security is already structured as individuals paying into their own accounts and purchasing a private good (an annuity), then what's the big deal? Of course it's not. The Supreme Court has held that there is no property right (no "private good") in one's Social Security "account," that the "explicit, legislated amount of benefits" is subject to revision at Congressional whim. This is part of the problem with Social Security. It would be better if Social Security were organized in the way Lindsey describes, but it's not.

On the other hand, opponents of privatization typically like to characterize Social Security in a way similar to this. (No one's going to touch "your" Social Security benefits.) The pretense that payroll taxes are special and have some intimate link with future Social Security benefits is typically made by defenders of the system. Open admission that the payroll tax is just like any other source of revenue and Social Security is just like any other spending program is likely to do serious damage to the sacred status of Social Security. In other words, the argument being made on the left right now in the context of tax distribution could come back to bite them when talking about Social Security in particular.

One more complication: When payroll taxes are understood as having a tight relationship to future benefits, then the regressivity argument becomes more complicated, because the benefits structure on the other end is tilted progressive. (Once I was told by people who studied this sort of thing that the regressivity of the tax and the progressivity of the benefits pretty nearly balance out, though I certainly didn't do the math myself.) If, on the other hand, the payroll tax is just a tax, then it's clearly a regressive one.

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