Time for Hard Choices — Not Hypocrisy

August 31, 2010 at 5:38 pm

Kathy Ruffing and I recently noted that the cost of extending the Bush-era tax cuts for upper-income taxpayers roughly equals the amount of Social Security’s 75-year shortfall. Today at The Atlantic, Megan McArdle questions both our estimate and our analysis. Here’s why our comparison makes sense.

First of all, the $700-billion figure that McArdle cites isn’t the full 10-year cost of the high-income tax cuts. It’s only the revenues that President Obama’s upper-income tax proposal would generate. The President’s proposal, however, also would reduce the tax rate on dividends from 39.6 percent under current law to 20 percent for high-income taxpayers. In addition, it would extend the 28-percent income tax bracket up to $200,000 for individuals and $250,000 for couples. Adding these two items, the total cost of the upper-income tax cuts is $837 billion over the 2011-2020 period and $120 billion in 2020 alone, based on estimates from the Joint Committee on Taxation and the Department of the Treasury. That’s about 0.5 percent of gross domestic product (GDP) in 2020.

Income taxes tend to grow as a share of income each year because rising real incomes push people into higher tax brackets, and we project that the high-income tax cuts will cost about 0.7 percent of GDP over the next 75 years. Social Security’s trustees estimate that Social Security’s shortfall over the next 75 years also equals 0.7 percent of GDP, so the cost of the upper-income tax cuts and the amount of the Social Security shortfall are about the same. McArdle correctly notes that the Social Security shortfall 75 years from now is higher than the 75-year average, but so is the cost of the upper-income tax cuts.

Despite what McArdle implies, the Center has not suggested that “you could ‘pay for’ the Social Security shortfall by rescinding the Bush tax cuts on the rich.” We have made quite clear that President Obama and Congress should let the upper-income tax cuts expire and devote the proceeds to deficit reduction. At the same time, as Kathy and I wrote, we have consistently argued that Congress should enact revenue and benefit changes that would place Social Security on a sound long-term financial footing.

In comparing the high-income tax cuts to the Social Security shortfall, we wanted to illustrate the hypocrisy of Members of Congress who argue that the tax cuts are affordable but Social Security is not, even though their cost is about the same.

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More About Paul N. Van de Water

Paul N. Van de Water

Paul N. Van de Water is a Senior Fellow at the Center on Budget and Policy Priorities, where he specializes in Medicare, Social Security, and health coverage issues.

Full bio | Blog Archive | Research archive at CBPP.org

1 Comments Add Yours ↓

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  1. Gerry FitzGerald #
    1

    Social Security will no longer be generating a surplus from the payroll tax, which I see as a tough budgeting problem. I know the Social Security system is entitled to cash in the Treasury note IOUs that have acculmulated in the Trust fund account over many years. But as those notes and their interest is used by Social Security, it will be a sizable new expense to pay from income taxes and other general (non-payroll tax) revenues. Because it was inevitable that this day would come, I always thought the Greenspan Commission’s idea of over-taxing low-income workers to deliberately create a suplus was a dumb idea (unless the law could have been changed to invest it in a stock index fund). Investing the surplus in the Treasury meant that the surplus wouild have to be paid back by our federal government in the future using new tax sources.

    In a sense, I’m complaining about spilt milk. It’s a done deed. (I think it was done, primarily to get extra revenue for the Reagan military build up.) But I’d like to see more tranparency about this new general revenue expense, so that we don’t do it again. I’m afraid, the government will increase the payroll tax (even if limited to income over $100,000)to create a surplus that can be used for other puposes, giving SS more IOUs.



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