A little more than a year ago, Daniel Patrick Moynihan took to the floor of the U.S. Senate to push a diabolically simple plan to give the nation’s faltering economy a much-needed jolt. His proposal: to reduce, in one fell swoop, the tax burden on 132 million low- and middle-income Americans and six million businesses, thereby fueling consumer spending and generating hundreds of thousands of new jobs.
Moynihan aimed to phase in, over five years, a 1 percent cut in Social Security payroll taxes. Under existing law, employers and employees pay a flat payroll tax of 6.2 percent each on wages, up to a ceiling of $53,400. Under Moynihan’s plan, the payroll tax rate on both sides of the equation would be gradually rolled back to 5.2 percent, where it would stay until 2015, when the rate would return to its current level. The earnings ceiling would also be boosted to $80,100 a year (it’s scheduled to rise anyway to about $69,000 in 1996 to keep pace with projected wage inflation).
Moynihan, a Democrat from New York, first floated the idea two and a half years ago in an effort to dramatize the fact that surpluses in the Social Security trust fund — now swelling at a rate of more than $1.5 billion a week — were being used to finance the day-to-day operations of government and camouflage the size of the federal deficit, rather than being set aside as retirement funds for the baby-boom generation. If left unchanged, in fact, Social Security payroll tares will pump up the trust fund to the point where it will have. At least on paper, five and a half times the amount needed to pay benefits in 2010.
Moynihan had a good idea — but one whose time, apparently, had not yet come. The Senate rejected his plan by a vote of 60-38.
The White House led the charge to kill the measure, with President Bush warning Senate leaders that it could “threaten to bankrupt the Social Security system.” A few months earlier he had branded Moynihan’s proposal “a charade,” and Richard Darman, the director of the Office of Management and Budget, had seconded the motion by calling it “the most irresponsible idea of the 1990s.”
As Moynihan’s tax-cut initiative headed to the Senate floor for the second time in just six months, the GOP had its ducks in a row. “This amendment,” declared Minority Leader Robert Dole of Kansas, “would bring social insecurity.” Added Republican Phil Gramm of Texas: “We should be debating tax cuts, but we shouldn’t mess with Social Security. The system isn’t broke. Don’t fix it.”
Tamper, tamper
Moynihan, however, can rightly argue that the system is, if not broke, broken. Social Security, he says, was never intended to be anything but a “pay-as-you-go” system.
And he’s not alone. “The Social Security tax was not intended to fund general budget purposes,” says Sheldon S. Cohen, who served as the commissioner of the Internal Revenue Service from 1965 to1969.
From the outset, Moynihan’s goal was to stop the federal government from looting the gargantuan surpluses that resulted from Capitol Hill’s overhaul of the Social Security system in 1983. Congress had accelerated increases in payroll tax rates to build up reserves for the nation’s baby boomers, many of whom will begin to reach retirement age early next century. The estimated annual surpluses: $83 billion this year, $126 billion by 1995, and $225 billion by the year 2000. As a result of modifications made in 1983, the Social Security system is expected to accumulate a reserve over the next 35 years of some $9 trillion in Treasury debt.
Charging Uncle Sam with “thievery,” “extortion,” and “embezzlement,” Moynihan contends that the trust fund is being improperly counted as general revenue to hide the frighteningly huge size of the budget deflcit.
What’s more, Moynihan says, the Social Security tax is about as regressive as you can get, partly because the wage base on which it is figured stops at $53,400 and partly because payroll taxes take a bigger bite out of most paychecks than income taxes. “It’s time the American worker got a break,” Moynihan says.
No kidding. As Moynihan points out, “Median family income, which is the best real measure of well-being in this country, is lower today than it was when President Nixon left office.”
It’s also time that the average American company got a break, and Moynihan’s proposal would undoubtedly do more to stimulate business and generate jobs than fiddling with the capital-gains tax or bringing back the investment tax credit, the cornerstones of the Bush administration’s economic recovery plan. Gary Hufbauer, a former economist for the Treasury Department, estimates that Moynihan’s payroll tax cut would create a million jobs in four years and thus add a million extra contributors to the Social Security trust fund.
But back, for a moment, to the heart of the argument: that the federal government is stealing from the Social Security trust fund to finance its deficit spending.
Bipartisan support
“The whole point about the Social Security trust fund is that there is no trust and no fund,” says Sen. Ernest F Hollings, a North Carolina Democrat who’s been one of Moynihan’s most vocal ailies. “The Treasury is siphoning off every dollar of the trust-fund surplus to meet operating expenses of the government and to hide the true size of the federal deficit,” Hollings claims. “By 1994, a cumulative sum of a half-trillion dollars will have been ‘borrowed’ from the trust fund, and the denuded fund will be piled high with IOUs. Those IOUs are a charming bookkeeping nicety, but they will be the 21st-century equivalent of Confederate war bonds.”
Lest you think that the debate over payroll taxes has been driven by partisan impulses, consider the conclusion of a paper by the House Republican Study Committee: “Contrary to popular belief, the Social Security trust fund is nothing more than an accounting device. It neither receives income from the public nor makes payments to the public. Until Congress and the public accept the Social Security trust fund for what it really is — an accounting fiction — the long-term viability of Social Security will remain in doubt.”
Though it seemed for a while as if Moynihan were merely tilting at windmills, his crusade isn’t as lonely as it used to be. He’s managed, in fact, to mobilize a coalition of odd political bedfellows behind his plan, from the AFL-CIO and Democratic Governor Mario Cuomo of New York to the U.S. Chamber of Commerce and the National Federation of Independent Business. He’s got both liberal and moderate Democrats on his side. including presidential candidate Bill Clinton and Senate Majority Leader George Mitchell of Maine. And he’s even signed up two of the Senate’s most incorrigible conservatives — Jesse Helms of North Carolina and Orrin Hatch of Utah — as co-sponsors.
What’s more, Moynihan has been slowly winning over some important converts on Capitol Hill. There’s Democrat Dan Rostenkowski of Illinois, the iron-willed chairman of the tax-writing House Ways and Means Committee. In January, after repeatedly snubbing the idea of scaling back Social Security taxes, he said that he might go along with the idea. There’s Pete Domenici of New Mexico, the ranking Republican on the Senate Budget Committee, who, after losing a fight to keep Moynihan’s measure from coming to a vote, said, “I cannot imagine how we could have made a worse mistake for the seniors of the United States.” Now he favors the measure.
And then there’s Jack Kemp, the secretary of Housing and Urban Development, who suggested in January that President Bush might call for a payroll tax cut in his State of the Union address. Bush didn’t. After later saying that his boss’s economic recovery plan was full of “gimmicks,” Kemp ceremoniously ate a plateful of crow.
Kemp understands as well as anyone in Washington that mounting federal deficits have all but undone whatever trickle-down there was in supply-side economics. President Ronald Reagan slashed taxes in his first term, all right — individual income-tax rates were cut by 23 percent over three years, for example — but since 1984, federal, state and local taxes have inched back to just about where they were when Reagan entered the White House: slightly more than 27 percent of the gross national product.
Federal income-tax rates are still lower than they used to be. But Social Security payroll taxes are higher. More than 32 million families now pay more in payroll taxes than in income taxes, according to the Congressional Budget Office.
C. Eugene Steuerle, a former Treasury Department official who’s widely regarded as one of the nation’s leading experts on tax policy, recently reviewed the tidal wave of tax legislation in the last 10 years and concluded that the result for most income groups was “almost no change in average tax rates.”
Once more with feeling?
Moynihan’s critics have persisted in arguing that his plan would trigger a corresponding increase in the ederal deficit, ven though Social Security — like the savings-and-loan bailout — has technically been “off the books” for some time now.
So, last October, Moynihan launched his third attempt to roll back Social Security payroll taxes by addressing that problem head-on. To make up for the estimated “shortfall” of $155 billion over the next five years, Moynihan proposed to shave defense spending by 7 percent through 1996 (for a savings of about $100 billion) and extract the rest from cuts in the government’s intelligence and space programs.
But will this be enough to satisfy Moynihan’s opponents ? Probably not.
Pity. Plenty of tax-cut proposals are being kicked around Capitol Hill — after all, this is an election year— but none makes as much sense as Moynihan’s. His plan would benefit every worker in America. When the plan is fully phased in. a worker earning $25,000 a year would save about $350 a year, as would his employer. Many of the so-called middle-class tax breaks would help only taxpayers with dependent children. And it would benefit every small business in America. A company with a $1.2 million payroll, for example, would save $10,000 in 1996.
But maybe, just maybe, common sense will prevail in 1992, or perhaps in 1993, when a new Congress gets down to business. A restive public fed up with a government that can’t balance its books — and lawmakers who can’t balance their checkbooks — just might rise up and order Washington to heed Moynihan’s commandment: “Thou shalt not purloin pension funds.”
This column originally appeared in the May/June 1992 issue of D&B Reports.
Finally, a Sensible Tax Cut
A little more than a year ago, Daniel Patrick Moynihan took to the floor of the U.S. Senate to push a diabolically simple plan to give the nation’s faltering economy a much-needed jolt. His proposal: to reduce, in one fell swoop, the tax burden on 132 million low- and middle-income Americans and six million businesses, thereby fueling consumer spending and generating hundreds of thousands of new jobs.
Moynihan aimed to phase in, over five years, a 1 percent cut in Social Security payroll taxes. Under existing law, employers and employees pay a flat payroll tax of 6.2 percent each on wages, up to a ceiling of $53,400. Under Moynihan’s plan, the payroll tax rate on both sides of the equation would be gradually rolled back to 5.2 percent, where it would stay until 2015, when the rate would return to its current level. The earnings ceiling would also be boosted to $80,100 a year (it’s scheduled to rise anyway to about $69,000 in 1996 to keep pace with projected wage inflation).
Moynihan, a Democrat from New York, first floated the idea two and a half years ago in an effort to dramatize the fact that surpluses in the Social Security trust fund — now swelling at a rate of more than $1.5 billion a week — were being used to finance the day-to-day operations of government and camouflage the size of the federal deficit, rather than being set aside as retirement funds for the baby-boom generation. If left unchanged, in fact, Social Security payroll tares will pump up the trust fund to the point where it will have. At least on paper, five and a half times the amount needed to pay benefits in 2010.
Moynihan had a good idea — but one whose time, apparently, had not yet come. The Senate rejected his plan by a vote of 60-38.
The White House led the charge to kill the measure, with President Bush warning Senate leaders that it could “threaten to bankrupt the Social Security system.” A few months earlier he had branded Moynihan’s proposal “a charade,” and Richard Darman, the director of the Office of Management and Budget, had seconded the motion by calling it “the most irresponsible idea of the 1990s.”
As Moynihan’s tax-cut initiative headed to the Senate floor for the second time in just six months, the GOP had its ducks in a row. “This amendment,” declared Minority Leader Robert Dole of Kansas, “would bring social insecurity.” Added Republican Phil Gramm of Texas: “We should be debating tax cuts, but we shouldn’t mess with Social Security. The system isn’t broke. Don’t fix it.”
Tamper, tamper
Moynihan, however, can rightly argue that the system is, if not broke, broken. Social Security, he says, was never intended to be anything but a “pay-as-you-go” system.
And he’s not alone. “The Social Security tax was not intended to fund general budget purposes,” says Sheldon S. Cohen, who served as the commissioner of the Internal Revenue Service from 1965 to1969.
From the outset, Moynihan’s goal was to stop the federal government from looting the gargantuan surpluses that resulted from Capitol Hill’s overhaul of the Social Security system in 1983. Congress had accelerated increases in payroll tax rates to build up reserves for the nation’s baby boomers, many of whom will begin to reach retirement age early next century. The estimated annual surpluses: $83 billion this year, $126 billion by 1995, and $225 billion by the year 2000. As a result of modifications made in 1983, the Social Security system is expected to accumulate a reserve over the next 35 years of some $9 trillion in Treasury debt.
Charging Uncle Sam with “thievery,” “extortion,” and “embezzlement,” Moynihan contends that the trust fund is being improperly counted as general revenue to hide the frighteningly huge size of the budget deflcit.
What’s more, Moynihan says, the Social Security tax is about as regressive as you can get, partly because the wage base on which it is figured stops at $53,400 and partly because payroll taxes take a bigger bite out of most paychecks than income taxes. “It’s time the American worker got a break,” Moynihan says.
No kidding. As Moynihan points out, “Median family income, which is the best real measure of well-being in this country, is lower today than it was when President Nixon left office.”
It’s also time that the average American company got a break, and Moynihan’s proposal would undoubtedly do more to stimulate business and generate jobs than fiddling with the capital-gains tax or bringing back the investment tax credit, the cornerstones of the Bush administration’s economic recovery plan. Gary Hufbauer, a former economist for the Treasury Department, estimates that Moynihan’s payroll tax cut would create a million jobs in four years and thus add a million extra contributors to the Social Security trust fund.
But back, for a moment, to the heart of the argument: that the federal government is stealing from the Social Security trust fund to finance its deficit spending.
Bipartisan support
“The whole point about the Social Security trust fund is that there is no trust and no fund,” says Sen. Ernest F Hollings, a North Carolina Democrat who’s been one of Moynihan’s most vocal ailies. “The Treasury is siphoning off every dollar of the trust-fund surplus to meet operating expenses of the government and to hide the true size of the federal deficit,” Hollings claims. “By 1994, a cumulative sum of a half-trillion dollars will have been ‘borrowed’ from the trust fund, and the denuded fund will be piled high with IOUs. Those IOUs are a charming bookkeeping nicety, but they will be the 21st-century equivalent of Confederate war bonds.”
Lest you think that the debate over payroll taxes has been driven by partisan impulses, consider the conclusion of a paper by the House Republican Study Committee: “Contrary to popular belief, the Social Security trust fund is nothing more than an accounting device. It neither receives income from the public nor makes payments to the public. Until Congress and the public accept the Social Security trust fund for what it really is — an accounting fiction — the long-term viability of Social Security will remain in doubt.”
Though it seemed for a while as if Moynihan were merely tilting at windmills, his crusade isn’t as lonely as it used to be. He’s managed, in fact, to mobilize a coalition of odd political bedfellows behind his plan, from the AFL-CIO and Democratic Governor Mario Cuomo of New York to the U.S. Chamber of Commerce and the National Federation of Independent Business. He’s got both liberal and moderate Democrats on his side. including presidential candidate Bill Clinton and Senate Majority Leader George Mitchell of Maine. And he’s even signed up two of the Senate’s most incorrigible conservatives — Jesse Helms of North Carolina and Orrin Hatch of Utah — as co-sponsors.
What’s more, Moynihan has been slowly winning over some important converts on Capitol Hill. There’s Democrat Dan Rostenkowski of Illinois, the iron-willed chairman of the tax-writing House Ways and Means Committee. In January, after repeatedly snubbing the idea of scaling back Social Security taxes, he said that he might go along with the idea. There’s Pete Domenici of New Mexico, the ranking Republican on the Senate Budget Committee, who, after losing a fight to keep Moynihan’s measure from coming to a vote, said, “I cannot imagine how we could have made a worse mistake for the seniors of the United States.” Now he favors the measure.
And then there’s Jack Kemp, the secretary of Housing and Urban Development, who suggested in January that President Bush might call for a payroll tax cut in his State of the Union address. Bush didn’t. After later saying that his boss’s economic recovery plan was full of “gimmicks,” Kemp ceremoniously ate a plateful of crow.
Kemp understands as well as anyone in Washington that mounting federal deficits have all but undone whatever trickle-down there was in supply-side economics. President Ronald Reagan slashed taxes in his first term, all right — individual income-tax rates were cut by 23 percent over three years, for example — but since 1984, federal, state and local taxes have inched back to just about where they were when Reagan entered the White House: slightly more than 27 percent of the gross national product.
Federal income-tax rates are still lower than they used to be. But Social Security payroll taxes are higher. More than 32 million families now pay more in payroll taxes than in income taxes, according to the Congressional Budget Office.
C. Eugene Steuerle, a former Treasury Department official who’s widely regarded as one of the nation’s leading experts on tax policy, recently reviewed the tidal wave of tax legislation in the last 10 years and concluded that the result for most income groups was “almost no change in average tax rates.”
Once more with feeling?
Moynihan’s critics have persisted in arguing that his plan would trigger a corresponding increase in the ederal deficit, ven though Social Security — like the savings-and-loan bailout — has technically been “off the books” for some time now.
So, last October, Moynihan launched his third attempt to roll back Social Security payroll taxes by addressing that problem head-on. To make up for the estimated “shortfall” of $155 billion over the next five years, Moynihan proposed to shave defense spending by 7 percent through 1996 (for a savings of about $100 billion) and extract the rest from cuts in the government’s intelligence and space programs.
But will this be enough to satisfy Moynihan’s opponents ? Probably not.
Pity. Plenty of tax-cut proposals are being kicked around Capitol Hill — after all, this is an election year— but none makes as much sense as Moynihan’s. His plan would benefit every worker in America. When the plan is fully phased in. a worker earning $25,000 a year would save about $350 a year, as would his employer. Many of the so-called middle-class tax breaks would help only taxpayers with dependent children. And it would benefit every small business in America. A company with a $1.2 million payroll, for example, would save $10,000 in 1996.
But maybe, just maybe, common sense will prevail in 1992, or perhaps in 1993, when a new Congress gets down to business. A restive public fed up with a government that can’t balance its books — and lawmakers who can’t balance their checkbooks — just might rise up and order Washington to heed Moynihan’s commandment: “Thou shalt not purloin pension funds.”
This column originally appeared in the May/June 1992 issue of D&B Reports.
C. Eugene Steuerle Daniel Patrick Moynihan Ernest F. Hollings Gary Hufbauer George Bush Phil Gramm Richard Darman Robert Dole Sheldon S. Cohen Social Security Payroll Tax