Wednesday, February 22, 2012

Does the Payroll Tax Cut Affect the Social Security Trust Fund?

On February 19th, the following conversation took place between interviewer Jake Tapper and Robert Gibbs on ABC's "This Week":

TAPPER: The president got something of a political victory this week when the House and Senate came to an agreement on the payroll tax extension, but it's not paid for, the $100 billion, so that payroll tax money will not be paid into the Social Security Trust Fund. One member of the president's own party called this bill "a devil's deal" and went on the say this.


HARKIN: I'm dismayed that Democrats, including a Democratic president and a Democratic vice president, have proposed this and are willing to sign off on a deal that could begin the unraveling of Social Security.


TAPPER: That's quite an ad against the president's re-election campaign from Democratic Senator Tom Harkin. Is this the unraveling of Social Security?

GIBBS: No, I strongly disagree with that characterization. This does not in any way threaten the livelihood of Social Security.

TAPPER: A hundred billion dollars is not going into the trust fund.

GIBBS: What it does do is help our economy get stronger at a time in which middle-class families we know continue, Jake, to struggle greatly with the high cost of living these days. And I think it was an important step. And I'm glad that Republicans in Congress accepted the president's position that we can't raise taxes on the middle class right now. It was an important step. It will help continue our economic recovery. And it in no way threatens the livelihood of Social Security.

The above is excerpted from this transcript on the ABC web site. Jake Tapper appears to believe that the reduced funding caused by the extended payroll tax cut will reduce the funds flowing into the Social Security trust fund. He states "payroll tax money will not be paid into the Social Security Trust Fund" and "a hundred billion dollars is not going into the trust fund". It's unclear if Robert Gibbs believes this since he only states that this "in no way threatens the livelihood of Social Security".

In any case, the same belief is expressed in this transcript of an interview between interviewer Judy Woodruff and Nancy Pelosi that was aired on February 16th on the PBS Newshour. Following is an excerpt:

JUDY WOODRUFF: Do you worry though that this does take money out of the Social Security trust fund and that it may never be fully be refunded, repaid?

REP. NANCY PELOSI: No, I don't worry about that. I think that this should be the last year for it.

I do believe that other factors in economic growth are weighing in now and we see an improvement in our growth possibilities but I think one or two years, no, the trust fund can handle that.

In fact, the payroll tax cut will have no direct effect on the Social Security trust fund. Following is an except from an LA Times article:

To be fair, thus far the payroll tax holiday hasn't impaired Social Security's fiscal resources one bit. By law, 100% of the cut must be compensated for by transfers from the general fund; those transfers have come to about $130 billion since 2010, covering the original "temporary" one-year holiday and a two-month extension passed late last year.

The new extension will require a further transfer of about $94 billion, according to the Congressional Budget Office.

This agrees with an article on the White House web site titled Will Extending the Payroll Tax Cut Affect Social Security? No.. This article was posted on December 9th, presumably for the two-month extension. Following is an excerpt:

While more money stays in workers’ paychecks, the law specifies that Social Security receive every dollar it would have gotten even without the payroll tax cut. This happens by automatically transferring resources from the government’s general coffers to the Social Security Trust Fund. And indeed, the chief actuary of the Social Security Administration has confirmed that the payroll tax cut would have no impact on the Trust Fund.

So what was Senator Harkin talking about in the video clip excerpted on ABC's "This Week"? A Huffington Post article mentions his statement that this deal "could begin the unraveling of Social Security" but continues as follows:

Harkin argued that Social Security had always been strong and protected because it was funded by its own dedicated tax stream that ensured every American would be guaranteed a basic income in their retirements, and that the program added not "even one dime to the deficits or the national debt."

But he said now that Congress was going to pay for this cut with borrowed money from the general treasury funds, the best argument of the program's defenders was gone.

"With this bill, we can no longer say that. We can no longer say that Social Security doesn't contribute to the deficit," Harkin said.

He argued that a far better plan would have been to simply grant working Americans rebates on their income taxes, the way Presidents Obama and George W. Bush had done in recent years.

It would be true that a rebate on income taxes would likely be easier to end. As stated in the aforementioned LA Times article, "with every extension of the payroll tax holiday, which was first enacted in 2010, the prospect that Congress will ever restore the tax to its statutory 6.2% of covered income recedes a little bit further over the horizon".

That seems to be a very common problem with "temporary tax cuts". They are very difficult to end as they are invariably depicted as major tax increases. The same problem occurred when the Bush tax cuts were scheduled to expire in 2011. This would seem to be a good argument NOT to implement temporary tax cuts that we cannot afford to make permanent, at least not without a credible plan for ending them.

In any case, it does seem to be a valid concern that the payroll tax cut could weaken Social Security by bringing into question its status as a self-funded program. But it clearly does not affect the Social Security trust fund or the payment of benefits directly.

Note: There is a discussion of this post at this link.

Monday, February 13, 2012

Is the Capital Gains Tax Double Taxation?

My prior post looked at the calculations behind Warren Buffett's claim that he paid a lower tax rate than any of the other people in his office. Specifically, Buffett claims that he paid about 17% of his taxable income in tax and his office staff paid percentages somewhere in the 30s. A number of articles disputed this claim, stating that, due to the double taxation of capital gains, Buffett actually paid a much higher rate. For example, a Wall Street Journal editorial titled "The Buffett Ruse" states the following:

This is because wealthy tax filers make most of their income from investments. Such income is taxed once at the corporate rate of 35% and again when it is passed through to the individual as a capital gain or dividend at 15%, for a highest marginal tax rate of about 44.75%.

This rate of 44.75 equals the top corporate tax rate of 35% plus 15% (the capital gains rate) of the remaining 65 percent. However, the 35% figure is the top statutory corporate tax rate. The effective or average corporate tax rate is well below that. In fact, a recent story in The Business Review references another Wall Street Journal article as follows:

A business tax break meant to spur corporate investment has dropped the effective corporate tax rate to the lowest level in 40 years, The Wall Street Journal reported, citing data from the Congressional Budget Office.

Total corporate federal taxes paid fell to 12.1 percent of profits earned from activities within the U.S. in fiscal 2011, which ended Sept. 30. That is the lowest level since at least 1972, and well below the 25.6 percent companies paid on average from 1987 to 2008.

Also, a number of sources suggest that the burden of corporate taxes do not fall fully on shareholders. For example, a paper from the Federal Reserve Bank of Kansas City states:

Corporations are responsible for remitting corporate taxes to the state, but the actual burden of the state corporate tax falls elsewhere - on shareholders, consumers, workers, or some combination of the three.

Further on, it states:

The most recent economic research suggests that labor bears the majority of the corporate tax burden at the national level. In response to higher state corporate tax rates, corporations may lower wages, thereby passing the burden onto workers.

Another source, an American Enterprise Institute article, states the following:

In this article, we argue that neither of the agencies' assumptions--that capital bears 100 percent or that no one bears the tax--is valid. Both approaches fail to reflect recent empirical and theoretic research that finds workers bear a large portion of the burden of the CIT. In particular, the empirical studies suggest that distribution tables that allocate 50 percent or more of the burden to labor may be closer to the truth.

Following is an excerpt from an article by Dean Baker regarding the argument that paying taxes on dividends amounts to "double-taxation":

The trick in this argument is that it ignores the enormous benefits that the government is granting by allowing a corporation to exist as a free standing legal entity. The most important of these advantages is limited liability. If a corporation produces dangerous products or emits dangerous substances that result in thousands of deaths, shareholders in the corporation cannot be held personally responsible for the damage. The corporation can go bankrupt, but beyond that point, all the shareholders are off the hook, the victims of the damage are just out of luck.

This goes along with the argument that the corporation and the shareholders are separate entities receiving separate benefits and government services. The government helps create the environment in which the stock market can function, to the benefit of the shareholder. It likewise helps create the environment in which corporations can flourish and provides corporations with the benefit that Dean Baker describes above. It can be argued what level of taxation these services merit. But the above arguments suggest that the taxes on capital gains and dividends do not qualify as double taxation.

Note: There is a discussion of this post at this link.

About Me

I became interested in U.S. budget and economic matters back in 1992, the first time that I remember the debt becoming a major issue in a presidential election. Along with this blog, I have a website on the subject at I have blogged further about my motivations for creating this blog and website at this link. Recently, I've been working on replicating studies such as the analysis at this link.

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