That Inconvenient Dedicated Tax

Since it is now early February, everyone who gets a paycheck has gone through at least one pay period under the reduced social security tax the congress passed and the president signed just about as late as possible in late December. Reckless is a good way to describe how the US Senate, and the US House approached extending that payroll tax reduction

During the debate, the Republicans in the House were correct that a two-month extension was no way to deal with tax policy, but voting against it would have been incredibly bad PR, so they acquiesced. Now, a little over a month later, we have a little less than a month to do it again. Have you heard any talk about another extension? Neither have I.

FICA is what the government calls it instead of Social Security tax. It stands for Federal Insurance Contribution tax. Reducing that tax was a bad idea in the first place. I know it was intended to fuel the economy by putting as much as $40 per pay period into lots of people’s hands, but let’s face it, $40 a paycheck is not a huge amount of stimulus.

Reducing the income tax would not have worked in the same, simple way because a lot of people don’t pay income taxes, but everyone who works on the books does pay the FICA, or Social Security tax. Cutting that tax was a bad idea because it’s the only tax dedicated to paying for Social Security benefits, and Social Security is severely under-funded if it’s going to meet the obligations we don’t even need an actuary to see coming.

Dedicated taxes are the ones that any government passes for a specific purpose. The FICA tax to pay for Social Security is one. The federal tax on gasoline is another as are lottery proceeds earmarked to support education as New York and some other states do. Dedicated taxes are good politically because they are more palatable to the electorate than most other taxes. Would you pay a gasoline tax to have a good interstate highway system? How about a Social Security tax to provide retirement and disability benefits? Or your local government may tell you it has to raise property taxes to hire more cops, and firemen or to avoid laying off the ones you already have.

So what’s the problem? Needs change and so do the sources of the taxes. At first, the gasoline tax went to pay for federal highways like US 1 and US 101 or interstate highways like I-95 and I-5. But when most of the highways were built, the tax collected too much money. Did Congress reduce the tax? No. It siphoned some of it off to pay for mass transit, and for highway maintenance. Then, the gasoline crisis hit so people bought more fuel-efficient cars. Even though gas prices went up, tax revenue went down. That’s why there are some in Congress now trying to come up with a way to charge us by the number of miles we drive each year, rather than by the amount of gasoline we consume.

In the case of Social Security, when the program started in the thirties as part of Franklin Roosevelt’s New Deal, most people died before or just after they reached retirement age, there were a lot fewer people in the USA, and the ratio of workers to retirees was a lot higher than it is now. Today, we have twice as many people in the USA, a larger percentage of them than before are retired versus still working, and far too many are unemployed, so they’re not paying either.

In other words, expenses have grown much faster than revenue, and every projection shows that trend will continue. Therefore, both houses of Congress, and the President in their extremely finite wisdom, teamed up to cut the tax without cutting the expenditures or providing another way to pay for Social Security. What would your family’s balance sheet look like if that’s the way you ran your finances?

To make up for difference, the government prints more money. If each of us did that, we’d go to jail, but it’s legal for Uncle Sam. The reduced payroll tax may stimulate the economy. It doesn’t look like it from where I sit, but maybe it does. Printing more money does cause inflation. That’s down the road a bit folks, but it’s coming, trust me. When inflation does arrive, it will wipe out either all or part of the stimulus that the Social Security tax cut is creating, if it is creating one which is arguable.

I’m against dedicated taxes in general, but I’m against lowering this one in particular because even before it was lowered, it didn’t bring in enough money to pay for the programs it was already supposed to pay for. You may have noticed through all of this that I haven’t mentioned the so-called Social Security Trust Fund. That’s because there isn’t one. All of the Social Security taxes go into the general treasury.

Author: Tom

I know my ABC's, I can write my name and I can count to a hundred.