Tuesday, March 31, 2009

Will Deferring Social Security Taxes Encourage More Current Consumption?

One of the proposals to encourage aggregate demand is to reduce payroll taxes. One might ask – how would one cover the lost revenue from such a proposal. Greg Mankiw has one answer:

I would institute an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax. I would make the two tax changes equal in present value, so while the package results in a short-run budget deficit, there is no long-term budget impact. Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift.

Amitai Etzioni proposes another:

The government should not collect Social Security taxes for one month — as long as the Obama administration commits the government to collect it for a 13th month once the economy is growing again at a fair pace … Last but not least, the Social Security tax is famously regressive. Hence, cutting it would put proportionally more money into the pockets of people most likely to spend it all in short order, a key goal for any stimulus.

Both proposals have no effect on after-tax lifetime income so if one is a proponent of Friedman’s permanent income hypothesis or the Ando-Modigliani lifecycle view of consumption or the Barro reformulation of Ricardian Equivalence – then deferring taxation would not be seen as encouraging more current consumption according to this theory. Then again - Mark Thoma reminds us that this theory may not work so well in practice.


rosserjb@jmu.edu said...

Yes, it probably would, but I do not trust people like Mankiw at all who have been calling for "reform" of social security and going on about how it is in "crisis," and so on. There was a story in today's WaPo all about how its surplus is running down faster than projected (because of the fall in its revenues due to the recession), with people like the execrable Andrew Biggs being quoted on how "something must be done," although also reportedly Obama has definitely decided not to have a commission on social security and is focusing on health care costs as the pressing budget problem that needs to be dealt with.

Shag from Brookline said...

Mankiw wants to sureptitiously "starve the beast" of Social Security by providing workers a little more money to spend on gas increases? On the other hand, is Greg merely passing gas?

TheTrucker said...

I can't believe that Mankiw actually said something that makes sense. But he did and then he snarls it all up with conservatism and states rights and other Republican crap. He is also very much on the path to claim that SS is going busted and that it desperately needs reform.

The general idea, however, of collecting carbon taxes (a tax on the petroleum content of fuels) as opposed to wage taxes in order to support the SS system is a very progressive move. Even if seems to open the door to bean counting trickle down nincompoops like Mankiw to impugn the fiscal integrity of the SS system the concept is a winner.

All that is necessary is to tell Mankiw to take his state based introverted micromanagement stupidity and stick it where the sun don't shine. The bonds being purchased by the SS system can be purchased with gasoline taxes just as well as they can be purchased with payroll taxes. And, as such, the proposal has nothing to do with adding more money in the "monetary" sense. It does, however, add money to the bottom of the economy if the bottom of the economy will act with due regard for their wallets. Not every penny gained from the FICA tax cut will be spent at the gas pump or on high priced "fresh" foods delivered from distant markets. The folks that live on beans and cornbread and ride the bus to work are not going to pay the piper to the same degree as those who dine on fresh lobster, and drive the Hummer while shooting the rod at all the common folk.

Mankiw suggesting something of merit is akin to the monkey in a room full of typewriters or a blind pinball player finding an Easter egg. The rational people should embrace it. Maybe it will go to his head.

As to Amitai Etzioni, I can only say that he obviously believes that we all max out our fica tax payments in the 11th month (or something). It reminds me of my boss telling me that since there are only 24 hours in a day then sometimes we have to work nights. The "economics profession" is really a disaster.

The proper move is to remove the cap and reduce the FICA rate right NOW and leave it that way. Mankiw and other neoconomists will do _ANYTHING_ to avoid that.

Anonymous said...


try putting a few numbers to your theory... including the false idea that Social Security is in any kind of trouble.

i think the gas tax that would replace the payroll tax would be about 12 dollars per gallon. but somebody may want to check me on that.

meanwhile, if the payroll tax is a "regressive tax" then it must be a tax on poor people. but if it is a "job killer" it must be a tax on employers. which is it?

answer... it isn't even a tax. it's a means whereby workers can save about ten percent of their income for their own retirement. kept safe from inflation by pay as you go with wage indexing. and safe from other kinds of losses by a PROGRESSIVE insurance payout in case of low lifetime earnings.

it would be really wonderful if people who have "ideas" about social security were required to take a class in which they would learn all the facts and how they relate to each other.

but i suppose they would have Biggs teach the class.


Jack said...

I was wondering when Coberly or Bruce Webb was going to chime in here. Thanks Dale for the good words. It is truly amazing how many well informed people are so poorly informed when it comes to SS. Those deductions from our pay checks is not even a tax, though every description of what it really is, Federal Insurance Contribution, uses the term payroll tax rather than deduction.

Using any other form of funding would only play right into the hands of the "SS crisis solvers." Once SS is funded by any other means than our own contributions, and those of our employers, the system would begin to resemble a form of assistance from without. Its intended purpose is to be a system of self reliance, though we are compelled to participate for our own good.

Anonymous said...

Beware those who wring their hands of deficits.

They good through the fortunes of the poor widows and orphans. Theirs is reserved the coldest regions of Hel's domain.

Couple of observations:

Gas taxes increase good. Green!!

Payroll tax decrease good. Stop bank rolling billionaires.

Increased deficit, maybe. obscures debt issue.

USG has tossed more to float AIG insurance than it could ever have to float SS with.

BruceMcF said...

Since the Social Security payroll tax is a regressive tax, which is defended on the basis of the political durability of the "contribution" myth, there is no reason not to reduce the rate to a "PAYGO rounded up for contingencies" rate, and have the Baby Boomer Bulge covered by a floating levy on those exempt from the basic contribution.

Yes, that would have a stimulus effect, from the immediate tax reduction, irrespective of what the PIH says ... PIH survives as a theory because the better performing Inertial Income Hypothesis is hard to sit upon utility maximizing foundations. However, since utility maximizing is a pseudo-science theory, using it to throw aside a theory with a better match to historical experience is not something economists would do if we were pursuing a scientific approach.

TheTrucker said...

Dear Mr. Anonymous,

Any shift of FICA tax onto petroleum tax is a _GOOD_ tax shift for many reasons. The amount of the shift is not actually relevant to that observation. Mankiw did not propose replacing the entire FICA system with revenue from a petroleum tax (though I believe that doing this over a 5 year term would be a very good thing), but such a replacement does not (or need not) translate into a claim claim that the SS system is failing.

I also see the SS system differently than most in that I see it as a system where the currently productive people are taxed to support those debilitated by age or by disability. The "wage tax" score keeping is just pandering to the religious orthodoxy of the right and their "work ethic" (ant and grasshopper). The idea/concept of "saving" is not destroyed by collecting a tax in a different way, and in the broader scheme a "saving" of fuel is probably a real "savings". The FICA tax has been abused since the 60's to shift the tax burden from the owning class to the producing class.

As regards your proposition of either "hurts the poor" or "hurts business" you will have to go a lot further. On the face of it, the proposition makes no sense. And the "wrong" of Mankiw's proposition lies in the USE of the tax proceeds as he diverts the revenue to general funds with no accounting for the LOAN. At the same time he makes no effort to support the general government by taxing the owner class. With that stuff about the governors he is just being a typical Republican as he gives the rich another tax break at the expense of the middle class.

A true revenue neutral (and bond buying neutral) shift would actually be stimulative in that people will change their spending habits and purchase more lip gloss and less fossil fuels.

This was not a discussion about "saving Social Security". It was a discussion about stimulus and for me, about fairness in the overall tax system. Any tax shift away from taxes on production (wages) and onto fossil fuels is a good tax shift. Even if the motives are suspect.

Robert D Feinman said...

I suggested abolishing the payroll tax altogether a few years ago. It is highly regressive. Instead there would be a change to the income tax rates and brackets. This would ease the burden on those at the bottom and remove the artificial cap on taxable wages subject to the tax.

Furthermore by changing the tax rate unearned income would be subject to tax as well.

This idea is usually dismissed, not because it can't work financially, but because there is a belief that Social Security still needs to be kept as a special fund for workers in order to be politically acceptable and to prevent poaching by the anti-SS forces.

I think after 70+ years we don't have to worry about people standing by if there were plans to eliminate SS. Using my ideas we would just reframe things so that there is an understanding that taking care of people in their old age is a moral necessity delegated to government, just like schooling or public health. This would decouple it from being a fund for workers and make it a basic human right.

Other nations have a view similar to this and it works just fine.

TheTrucker said...

Someone posting as Anonymous and signing as "coberly" has insinuated that my knowledge of the SS system and the FICA tax is wanting. That is probably true in that my knowledge will forever be wanting in every field of endeavor.

I have my own wishes concerning the education of others and would want the, so called, economists to do a little less bean counting and a little more investigation into how rational human beings actually behave. And perhaps a little more investigation into climatology and actual "quality of life".

It makes no difference whether the "retired" are taxing the output of production through the tax system or through the extraction of interest, dividends, and rents. Such extractions are just as much a tax on production as would be a direct tax by government. The difference is that a decent government can "tax" in a way that is more appropriate to the good of the vast majority.

When we "save" we forgo consumption such that others can/will consume. They then (on the books) "owe" us. As a matter of fact the Republicans use this indebtedness as witness to the reckless spending of others while exhorting everyone to "go shopping". Piling up an account balance is merely a bookkeeping effort necessary to measure our contribution and our typical life style while working. That "typical life style" is a guide in awarding a SS income. But this does not mean that the SS outlays must be funded by the wage tax. A tax on BADS is always better than a tax on production. The books can still be kept just as before and the revenue shifted from wages to fossil fuels can be "accounted" just as it is now.

Anonymous said...

calling Social Security a "regessive tax" is proof that liberals can be as ignorant as the hard right.

if a rich man buys a loaf of bread, do we charge him more because he is rich?

if people buy old age insurance, should we charge them more than they will ever get back because they are rich?

Franklin Roosevelt, who knew something about Social Security didn't want it to be a "dole." He wantd the workers to pay for their own insurance "so no damn plitician can take it away from them."

I am sorry some people are unable to understand that, because they have been taught to say "regressive tax bad, progressive tax good." And if you show them an elephant with the word "HORSE" painted on it, they will go to their graves thinking they saw a VERY BIG HORSE with a funny nose.


(that's "Anonymous" to you, Trucker)

rosserjb@jmu.edu said...

Hmmm. Tried to comment and thought it took, but did not.

I remain in the "do not touch social security at all in any way, shape, or form" camp. Any fiddling with it just opens the door to all kinds of baloney. It ain't broke and it don't need fixing.

Regarding Mankiw's proposal, who is to guarantee that the gas tax increases will go to the social security fund, and that this is not just scam to set SS up for future whining about how it is broke and so bennies must be cut and it must be privatized, blah blah? And for that matter, gas taxes are regressive also, so that is not much of a gain on the distributional front.

I do think we should have higher gas taxes, but a better way to go would be to just cut the marginal income tax rate further on lower income people if one wants to offset the negative aspects of a higher gas tax.

Leave social security alone!

Anonymous said...


I agree with you, so the following comment is not directed at you.

A small note on the intelligence of (some) economists:

Put their noses to the ground so they can smell recession, then whisper "regressive tax! stimulus!"

and watch them go baying off into the bushes yelling "cut the payroll tax, provide a stimulus!"

because it will never, ever, occur to them to ask if using the payroll tax to provide a stimulus is the only way to provide a stimulus, or if it is worth destroying social security in order to provide a stimulus.

and they sure as hell won't know that social security was invented during a "recession" expressly to take away current spending power from workers in order to provide them with (an undoubtedly stimulating) purchasing power when they are too old to work.

you see, you can take a highly trained circus dog and put him out in the woods or on the street with an average mutt, and get a good lesson on the difference between "highly trained" and "actual intelligence."


Jack said...

"A small note on the intelligence of (some) economists:"

Coberly, I think that you are being too generous when you attribute some points of view as resulting from a lack of intellect. In most cases in both economics and politics it would be more accurate to describe certain points of view that seem to persistently ignore the facts as an effort at obfuscation, or out right deception. Deceit might be a bit too strong.

Jack said...

"The general idea, however, of collecting carbon taxes (a tax on the petroleum content of fuels) as opposed to wage taxes in order to support the SS system is a very progressive move." Trucker

This is simply contrary to the intent of the Social Security system as it has worked these many years. Keep in mind that by that very track record we should recognize the effectiveness of that intent. That is that SS is and has never been simply a means by which the government looks after the poor old folk. The very intent of SS is to avoid the need for government support of the retired population. It is a safety net of sorts. It was not intended to be the full support of a retiree, but to buttress one's nest egg. Of course a great many people are beginning to see SS as their life line and that fits into the original model. Things go wrong, but while you're working you are obliged to but a little away for that just in case scenario. It is not government support which come from the general budget. It is distinct from the general budget in order to avoid any conflation of the funding streams. It is worker funded and capped because so too is the eventual payment capped. Think of it as one's obligatory 401K, but out of the reach of the investment banking industry.

TheTrucker said...

We see Coberly (who may or may nor be a Republican) saying:
"and they sure as hell won't know that social security was invented during a "recession" expressly to take away current spending power from workers in order to provide them with (an undoubtedly stimulating) purchasing power when they are too old to work."

The reality is, of course, entirely different:


Q4: Is it true that Social Security was originally just a retirement program?

A: Yes. Under the 1935 law, what we now think of as Social Security only paid retirement benefits to the primary worker. A 1939 change in the law added survivors benefits and benefits for the retiree's spouse and children. In 1956 disability benefits were added.

Keep in mind, however, that the Social Security Act itself was much broader than just the program which today we commonly describe as "Social Security." The original 1935 law contained the first national unemployment compensation program, aid to the states for various health and welfare programs, and the Aid to Dependent Children program. (Full text of the law)













Anonymous said...


no. i am not a republican.

but your need to put a lable on those who disagree with you, so you don't have to think about what they say, is a fairly good indication of the quality of your thinking.

god knows what your point about the original intent of Social Security is supposed to be.

you look to me like one of those, alas many, folk who substitute citations for actual understanding.

did i say something above about painting "HORSE" on an elephant?

Jack said...

I think that you are misunderstanding Coberly's use of sarcasm in that particular quote. Yes, SS is and always has been first and foremose a retirement program. You are passing over the more significant point which is that it is a program intended to be seperate and apart from the general budget and all other forms of taxation (fund raising). It has evolved into a program which has a substantial indemnification aspect in the event of a health catastrophy, including the death of the earner. Still both aspects, are funded via the obligatory contributions of the workers who will benefit in the future. A forced participation in retirement planning so that one will not become a ward of the state in old age or as a result of serious disability or death. It must be directly funded by workers in order to be kept distinct from that category of entitlements which are too easily seen, after the fact, as unwarranted, too expensive or "in crisis."

I am surprised, being familiar with your many comments on this site, that you are taking the position outlined above. This is not a progressive vs conservative issue. This is an issue being obfuscated by reactionary elements in our economy.

Bruce Webb said...

Trucker as it happens the poster known as 'Coberly' is a guy actually named Coberly who has studied the actual numbers and thought about their implications in a way that you have not. Perhaps you need to get out more and examine some of his work as published on Angry Bear and indexed at my web site.

Social Security as currently configured draws nothing from capital and so draws nothing from capital. This provides it a limited amount of political insulation from capital tinkering with it. Removing the cap and changing its funding base from payroll tax to income tax at first glance looks progressive but in practice transforms it from worker funded insurance for workers to welfare. If we really in a position to move to European style Social Democracy a change from an insurance model to a national pension model might make sense. But as it is opening up Social Security to charges that it is just welfare is madness.

Leave Social Security alone. There are plenty of places to reinject progressive taxation into the system, for example we could use surcharges on upper level incomes to fund health care for all. But there is no reason to screw around with Social Security at all in the medium term, and in the long term it is better to rely on workers funding their own retirement than going cap in hand begging for funds from capital.

Social Security is the result of a very careful political calculation that has kept it safe despite constant attacks from its opponents from day one. It is dangerous to assume that you are smarter than the New Dealers who ran the numbers that went into the current model.

Bruce Webb said...

that second 'draws nothing from capital' should have read 'owes nothing to capital'