http://www.salon.com/news/politics/barack_obama/index.html?story=/politics/war_room/2010/12/10/zelizer_social_security_tax
Friday, Dec 10, 2010 08:30 ET
War Room
Obama is dealing away FDR's legacy
By Julian E. Zelizer
With public attention focused on President Obama's compromise with
Republican leaders to extend the Bush tax cuts for the wealthy,
there has been less discussion about a feature of the deal that
could have enormous long-term consequences: the payroll tax
holiday.
Under the plan, which still must be approved by the
House and Senate, the payroll tax would be cut by 2 percentage
points for all wage-earners -- meaning that a worker making
$40,000 would receive an extra $800 in his or her paycheck over
the course of a year. The White House and its defenders are
touting this as a way to boost the stalled economy, and it might
just do that. But they're also playing with fire.
For supporters of the program, the use of Social Security tax
reductions for economic stimulus is a dangerous political
precedent. The tax holiday plays directly into the "Starve the
Beast" strategy that conservatives have pursued since the 1980s.
After Ronald Reagan's election in 1980, Republicans learned that
directly attacking domestic programs was hard to do. When Reagan
pushed for cuts in Social Security in 1981, he faced a massive
backlash that forced him to back down. President George W. Bush
encountered the same fate in 2005 when he tried to spend his
political capital on Social Security reform. The lesson was
learned. Republicans instead focused on a strategy whereby ongoing
tax cuts would gradually leave the federal government with less
revenue for new programs and make existing programs susceptible to
attack as a result of deficits.
A key reason for the program's strength has been the sanctity of
the Social Security tax, which has been treated as a special tax,
distinct from income and corporate taxes, on the grounds that it
is linked to a specific government benefit. Every year, Congress
uses the funds collected from payroll tax contributions of workers
to pay for the benefits of current retirees. "With those damn
taxes in there," Franklin Roosevelt once declared, "no damn
politician will ever scrap my Social Security program."
The Social Security tax served two main political functions. The
first has been to create strong ongoing support for the program
from those who pay the taxes and those who receive the benefits.
Social Security's contributory tax system creates perceptions of
earned rights and helps distinguish the program from welfare. The
tax has also made Social Security an inherently conservative
program, at least from a fiscal standpoint, which has
traditionally allowed many budget hawks -- like Wilbur Mills, the
old Ways and Means chairman -- to support it. Unlike almost any
other program, policymakers have been forced to adjust taxes to
pay for the short-term obligations of government and to plan for
future costs. The contrast with almost any other form of
government spending, such as defense and agricultural subsidies,
is striking. The design forced Congress to take the unpopular step
of raising taxes and cutting benefits in 1977 and 1983 when the
system faced insolvency.
Thus, opponents of the program have tried to undercut the payroll
tax. From 1935 to 1950, Social Security remained a small and frail
program. The program covered only a limited part of the workforce
and paled in comparison to Old Age Assistance (a means-tested
program for the elderly) that was far more generous. In 1939,
Congress abandoned the original plan to build a surplus of revenue
to pay for Social Security benefits. During World War II, Congress
froze Social Security taxes and in 1944 passed an amendment that
authorized the use of general revenue to eventually pay for benefits.
Social Security supporters fought to protect the tax. They
realized, as the Social Security Board stated, that the payroll
taxes was the "psychological basis" for the program. Social
Security supporters warded off the threat when in 1950 Congress
passed amendments that prohibited the use of general revenue and
ensured that payroll taxes would be the only mechanism through
which Social Security benefits were paid for. There have been
times when politicians privately thought about this part of the
equation. In 1967, for example, LBJ believed that a Social
Security tax increase -- which was tied to a benefit increase --
would help restrain inflation at a time that Congress was refusing
to pass a tax surcharge for this purpose. But the White House and
Congress were very careful to avoid making this part of public
discussions or the explicit reason for any change in the payroll
tax rates.
Many liberal economists were never comfortable with this
agreement. During the 1970s, as the political scientist Eric
Patashnik argued in "Putting Trust in the US Budget," Keynesian
economists challenged the tax structure. They argued that the
payroll tax undercut macroeconomic policies. Payroll tax hikes
constituted a regressive way to fund benefits and sometimes went
into effect when the government was trying to stimulate the
economy. There was another strong push to use general revenue.
Generally, their efforts failed and the payroll tax remained
outside the debates over stimulating or restraining the economy.
When Republicans pushed for income and corporate tax cuts after
the 1980s, Social Security taxes continued to rise.
By insulating the payroll tax from the perennial debates in
Washington over cutting taxes to stimulate demand and investment,
politicians have protected the program from short-term economic
and partisan pressures.
But this time the situation appears to be different. President
Obama and the congressional Republicans agreed to break with this
precedent. In the future, proposals to further cut Social Security
taxes -- including to do so on a permanent basis -- will certainly
be on the table. Once politicians have tasted the political
sweetness of tax cuts, they always come back for more. If they
succeed, it will worsen the long-term budgetary challenges facing
Social Security and create more room for opponents to attack.
Indeed, simply by entering into a bipartisan agreement to change
the way that Social Security taxes are discussed, the odds improve
that one day, some politician might very well be able to scrap
FDR's program.
* Julian E. Zelizer, a history professor at Princeton
University, is the author of "Jimmy Carter," "Arsenal of
Democracy," and the editor of "The Presidency of George W. Bush."
More: Julian E. Zelizer
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