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January 28, 2005

Yet More Reading Again

Via Peknet, here's an excellent interview with David Kay Johnston about his book Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich—and Cheat Everybody Else.

Peter Karman, proprietor of peknet, wonders whether these statements by Johnston about Social Security are valid:

CP: Another complex topic you render understandable in your book is how Social Security has been used to underwrite cuts for the wealthiest taxpayers. Given how hard Bush leaned on Social Security to finance those tax cuts during his first term, is his plan to privatize it going to come back to haunt him?

Johnston: None of the news coverage of social security is addressing how it is a subsidy program for the super rich, none of it is addressing that President Bush is not being internally consistent when he says I want you to have more of your own money. Why isn't he simply proposing that we reduce social security taxes by the amount of money he thinks younger workers shouldn't pay, and then they can choose whether they want to spend it, which would stimulate the economy, or save it, which would stimulate long-term investment? Instead, why is he proposing to create a massive, new government program that will funnel fees to Wall Street? None of the news coverage is stepping back and asking that. It's all reactive to what the president is saying. I think that's in good part because the Democrats don't have a clue. The Republicans have an agenda and the Democrats don't have a clue.

Now, the reason the president would not propose letting younger workers pay a reduced social security tax in return for smaller benefits is that it would immediately expose that the financing of his tax cuts depends in good part on middle class workers paying excess social security taxes so that rich people can have lower income taxes. It would bring it right to the front of the budget debate. So they would never propose that.

The answer is: sort of. Johnston is saying two things here:

1. Social Security is "is a subsidy program for the super rich."

Well... hopefully not. What he's talking about is the Social Security Trust Fund. In 1983, there was a big bipartisan compromise to put Social Security on sound footing for the baby boomers' retirement.

Before then, Social Security had been paid just by payroll taxes. Payroll taxes fall most heavily on lower income workers: everyone pays (for SS) a flat 12.4% of their salary up to about $90,000/year. Thus, someone making $90,000/year pays exactly the same amount (NOT percentage) of payroll taxes as Bill Gates. And someone making $12,000/year pays exactly the same percentage as someone making $90,000/year.

By contrast, the income tax is progressive; that is, the more money you make, the greater a percentage of your income you pay. Plus, both salaries and non-salary income is taxed. (Rich people usually have lots of non-salary income—from bonds, the stock market, etc.) So, richer people pay most of the income tax. I believe the top 1% of households pay 30% of the total income tax take, and the top 5% pay 50%.

The 1983 compromise included a BIG hike in the payroll tax—so much that the SS payroll taxes were bringing in much more in revenue than was being paid out to current retirees. This is still true today, and is projected to be so through 2018. The surplus revenue is lent to the federal government. In return, Social Security gets government bonds, which it puts in the Social Security Trust Fund.

What happens in 2018? If the projections are right, that will be the year that payroll taxes will stop bringing in enough money to pay current retirees. At that point, Social Security will begin to redeem the bonds from the trust fund.

This is what (lying) people mean when they the Trust Fund is just a "promise to ourselves." Money to pay off the Trust Fund won't come from outer space—it will come from Americans. But the important part is this: the money to redeem them will come from the income tax, not payroll taxes. That is, it will come mostly from the most affluent people in America. This is the reason (lying) people also call the Trust Fund "meaningless IOUs." They say this because they're not meaningless. The Trust Fund is IOUs from richer Americans to poorer Americans. Thus, they're called "meaningless IOUs" because richer Americans don't want to pay them.

In other words, the 1983 compromise was in essence a promise: America's poorer workers would pay higher taxes through their working life. In return, America's richer people would contribute to their retirement.

But what Johnston means is that both Reagan and Bush II have been able to cut income taxes for America's richest people because the surplus payroll taxes made the government's overall position look better than it is. For instance, in 2002 the government spent $158 billion more than it took in in taxes. In the scheme of things, that's doesn't seem so bad.

BUT -- without the surplus Social Security payroll taxes, which were $162 billion, the deficit would be $317 billion. (158+160=317 [with rounding]. You can see the numbers here in Table 8.)

And this is really the right way to count it. The Social Security surplus is actually a liability for the government, because the SS surplus will have to be repaid, unlike other taxes.

So, if the promise made in the 1983 compromise is kept, then Johnston is pretty much wrong. Taxes were cut on richest Americans by Reagan and Bush II, but will have to be raised again to pay for the redemption of the Trust Fund. But if the US somehow defaults on the Trust Fund bonds (and there are sneaky ways to do this), then Johnston will have been right. Conservatives will have jacked up taxes on poorer people, and massively cut taxes on the wealthy.

As I've mentioned before, the economist Dean Baker has calculated that such a Trust Fund default would transfer over a trillion dollars from the bottom 95% of households to the top 5%. A household in the top 1% would gain an average of $730,000.

For the record, I don't think this will happen. But just the fact that people discuss it as a possibility is an ominous sign.

2. Johnston also says "President Bush is not being internally consistent when he says I want you to have more of your own money."

This is completely right. Bush doesn't mean what he says. If he did, he'd just call for the abolition of Social Security. Then people could do whatever they wanted with their money.

Instead, Bush wants to force people to put their money in private accounts. A big chunk of this money (probably 10-30%) will go to Wall Street money managers. Thus, Bush wants to force Americans to give lots of their money to Wall Street.

Let me know if any of this isn't clear.

Post edited to eliminate embarrassing arithmetic error.

Posted at January 28, 2005 02:23 PM | TrackBack

Yup - makes perfect sense. So, despite the fact that the US has the largest wealth discrepancy since before the 1920's (according to rad-lefties like former Nixon admin. guru Kevin Phillips), it's not good enough! The fat cats (or, to quote Jonathan, the crazy rich) are ready to hack away at the last vestiges of the social safety net.
Man, they'll need one hell of a gated community to keep us all out.

Posted by: mk at January 28, 2005 04:21 PM

The Republicans have an agenda and the Democrats don't have a clue.

Huh? The Democrats don't have a clue? They are ignorant and no one cares to enlighten them?

Wouldn't it be more rational to assume that the Democrats have pretty much the same agenda and the whole squabble is mostly about details?

Posted by: abb1 at January 28, 2005 05:28 PM

You ever see those guys yelling at a three card monte dealer to keep it honest, and dontcha dare try to pull any fast ones? When the game is over, they get on the subway with the dealer and split the loot.

At any given time, there are between twenty and forty five Democrats who are not like that in the legislative bodies. The rest of them, when they deliver speeches, really ought to end with "you have been trolled, have a nice day".

The portion of the citizenry that can plausibly lay claim to values beyond screwing their neighbors needs to think a bit more strategically.

Posted by: Harry at January 28, 2005 06:12 PM


um, come again? from table 8, I think you mean 158+160=317 (with some rounding error)

but maybe you borrowed some of the famous fuzzy math


Posted by: anon at January 29, 2005 12:25 AM


I MEANT WHAT I SAID. However, I use different "numbers" than you may be familiar with.

Seriously, though, thanks for pointing that out. I've now corrected it. All I can say in my defense is I was writing this quickly.

Posted by: Jonathan Schwarz at January 29, 2005 12:49 AM


Man, they'll need one hell of a gated community to keep us all out.

One of my favorite headlines in Our Dumb Century is "Wealthiest One Percent Complete Construction of Private Escape Pod."

Posted by: Jonathan Schwarz at January 29, 2005 10:07 AM