Editore"s Note
Tilting at Windmills

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January 26, 2005
By: Kevin Drum

SOCIAL SECURITY BONDS....In 2018 (approximately), payroll taxes will no longer be enough to cover Social Security payments. To make up the difference, treasury bonds from Social Security's trust fund will be sold back to the government, and in order to pay for those bonds income taxes will have to be raised.

Is this fiscal Armageddon? Hardly. As I say in Thursday's Christian Science Monitor, middle-class workers have been subsidizing high earners for over 20 years as part of the bargain crafted in the Greenspan/Reagan reforms of 1983:

For more than two decades, low- and middle-income Americans have kept their part of the bargain, paying more in payroll taxes than Social Security needs and helping to keep income taxes low. In return, beginning in 2018, high earners are expected to start paying a bit more in income taxes in order to help keep payroll taxes low.

The key point here is that payroll taxes are mostly paid by middle and low income workers and they've been overpaying for years. Income taxes are mostly paid by the well off, and the extra money from payroll taxes has allowed them to underpay for years. In 2018 that reverses, so paying back those bonds isn't just a moral obligation between generations, it's also a moral obligation between the wealthy and the middle class.

Here's an interesting addendum. During the editing of this piece the Monitor's op-ed editor asked me how much income taxes would have to be raised. There's no precise answer to this, but after a bit of mental noodling I told her it was in the neighborhood of 1% per year for 20 years starting in 2018, a total increase of about one-fifth compared to today's tax rates. This startled her because it seemed so high.

But here are some numbers to chew on:

  • In 2004, Social Security had income of $653 billion and paid benefits of $500 billion.

  • That amounts to a surplus of $153 billion. If workers weren't overpaying that amount, we'd have to make it up with higher income taxes in order to stay revenue neutral.

  • Total personal income taxes in 2004 amounted to $765 billion. Raising an additional $153 billion would require income taxes to increase by one-fifth.

So while a one-fifth increase in income taxes starting in 2018 might seem like a lot, income taxes would be a fifth higher right now today if the middle class weren't already overpaying payroll taxes by considerably more than a fifth. Compared to that, the phased in approach starting a decade from now looks pretty sweet, doesn't it?

UPDATE: Based on comments, "20%" changed to "one-fifth" throughout. Just to be clear, if you pay, say, 15% of your income in income taxes, a one-fifth increase means you'd pay 18% of your income in taxes.

Kevin Drum 10:28 PM Permalink | Trackbacks

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