Towards A Good Samaritan World

Friday, March 25, 2005

RAISE TAXES AND PRIVATIZE SOCIAL SECURITY

I'm disgusted with the Democrats for refusing to entertain the notion of private accounts. As a twenty-something, I've been despoiled by the program, and the only way my trust can be restored is by giving me something I own.

But there's a parallel form of numbskulled denial on the other side: the Republican refusal to consider tax hikes. Yes, I want a smaller government; yes, I realize that a low-tax environment is good for business and growth; yes, I realize that taxes are a burden and reduce labor incentives, and so on. But. Deficits are bad for the economy, too-- worse than taxes, I'm convinced. It would be wonderful if Congress would cut spending. But they aren't. So we need to raise taxes.

We especially need to raise taxes if we're going to create private accounts. One of the big advantages of private accounts is that it would allow the government to eliminate its dissaving. Under the present system, the Trust Fund is required to buy Treasury bonds, and the government has to borrow to make this possible. Private accounts can raise the savings rate, but the government has to take the opportunity to reduce its dissaving, i.e. raise taxes.

The good guys in politics today are Republicans like Lindsay Graham, who are willing to entertain tax hikes, and Democrats like Joe Lieberman, who are willing to modernize Social Security. But they are sadly scarce. Voters need to treasure such politicians, and re-elect them by wide margins, so that others will take note.

6 Comments:

  • We don't have to do either, just put a stop to the limit on social security tax. As it stands now the limit is at $90,000 annually...meaning once you've made $90,000.01 you no longer pay into a social security fund. Stop this limit and ALL fiscal problems with SS stop, here and NOW!

    By Anonymous Anonymous, at 7:08 PM  

  • "... It would be wonderful if Congress would cut spending. But they aren't. So we need to raise taxes."

    Yes, I suppose that would present a sort of second-best solution, if one makes the totally unwarrented assumption that things would stop there. Unfortunately, my experience suggests otherwise. I'd estimate the marginal propensity to spend for the typical legislator is roughly 1.25. Provide them with an additional $1T in tax revenue and you you'll get an additional $1.25T in spending. Of course they'll swear on their children's souls that the tax increase is "temporary", and is "earmarked" for debt reduction, the social security "trust fund" or whatever other cause of the moment that will lure the public into supporting it. The simple fact is that, to paraphrase Parkinson, government spending inevitably expands to exhaust anyand all revenue available to it.

    As one example, back in the late 80's Massachusetts had what was for that time a horendous state deficit, but which would be peanuts by today's standards. To address the problem, the legislature increased taxes by about 20%. The governor immediately proposed a collection of new spending proposals now that they we could afford them. While his proposals were largely shot down, it was only a strategic move on the part of the legislature. Such honesty of intentions might tend to alert the public.

    Within a few years the state deficit was not eliminated, but at least now considered to be manageable. Were the "temporary" tax increases repealled? Of course not, silly. Most of them are still in effect today, the only reduction being the direct result of an initiative petition that was fought in a no-quarter-asked-or-given style by the legislature, public employee unions and everyone else feeding at the public trough.

    While today's federal debt is at a record level in both actual and real dollar terms, as a percentage of GDP it isn't at all out of line with post WWII trends. In 1946 gross federal debt was about 114% of GDP. By the late 70's the ratio was down to about 32%. By 1995 it had grown to a peak of just over 65%. The estimates for 2004 place the ratio at just of 50%, roughly the same level as when JFK took office, and hardly a justification for panic.

    By Anonymous Strophyx, at 7:47 AM  

  • If Strophyx is right about the "marginal propensity to spend for the typical legislator," achieving fiscal balance is a priori a lost cause. I'd like to avoid that conclusion.

    Aren't there some institutional changes we could make to restrain Congressional spending? Could we, for example, trade a tax hike for a line-item veto? Are we just going to say, "Starve the beast, and never mind the deficit, because achieving fiscal balance is hopeless anyway?" If we want to contribute to (or dominate) the debate, we have to offer solutions.

    You may be right that the deficit is not so terrible right now. But if you consider the projected growth in entitlement liabilities, our fiscal position is catastrophically bad.

    Re: anonymous. Policy suggestion noted, but it doesn't support your claim that "we don't have to do either [raise taxes or privatize Social Security]." Removing the cap would be a tax hike. A VERY BIG tax hike.

    By Blogger Lancelot, at 6:46 AM  

  • I may just have been in an overly cynical mood when I posted that --- The MPS is probably not much above 1.1. Seriously though, debt is not nearly the overwhelming evil it's often depicted as. When we were much younger (and I was in grad school) my wife and I took on a debt equivalent to several years' pre-tax income for both of us. That hasn't quite been retired yet, having been rolled over several times into larger homes. Our son did the same thing a couple of years ago, only for a much higher debt-income ratio. So far he's realized more than a 100% return. If the federal government were to practice a similar level of selectivity in its spending, it too might achieve something worthwhile through its borrowing.

    While we all wring our hands over the federal debt, our own personal debts are much larger. From 1959 (the earliest date for which I have data handy) until roughly 1981 the federal debt hovered at about 75% of total private debt. At that point private debt begain to climb much faster than the federal debt, even though it's the later that gets all the attention. As a result the ratio has declined steadily to its curent level of a bit under 53%.

    That aside, I too would like to see a much smaller government, particularly at the federal level. Given my well-founded scepticism with regard to lowering debt by raising tax revenue, I'd tax increases as akin to recommendeding leeching as a treatment for shock. I also question the effectiveness of a line-item veto would do much to accomplish that. That relies too much on a balance of powers argument, ignoring log-rolling behavior among legislators and the executive. (Sign the funding for my project and we'll pass a funding bill for your project.) Just look at the way that congress has skipped around the so-called Balanced Budget Act with a perrenial wink and nod. A better approach might be to limit total government spending (both on and off budget) to some multiple of GDP by a Constitutional Amendment.

    [BTW, I particularly enjoyed your article on Work, Service and Worship. Thank you.]

    By Anonymous Strophyx, at 4:25 PM  

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