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**DECEMBER 19, 2022**
Kuttner on TAP
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**** The Coming Social Security
Clash
The worsening income distribution has reduced payroll tax receipts.
Progressives need compelling reforms to defend and strengthen our most
popular program.
Key Republican senators and House leaders have proposed cutting Social
Security
<[link removed]>
or subjecting its spending to an annual vote, citing budgetary needs.
This would seem to be political suicide. Voters care a lot more about
keeping their benefits than about fiscal details. Yet Democrats would be
foolish to ignore the projected shortfalls in the Social Security trust
funds, which undermine confidence in the program.
One reason for Social Security's financial crunch, which has gotten
almost no attention, is the worsening income distribution and the lousy
pay for so many workers. Social Security is financed by payroll taxes on
earnings. Reforms in 1977 and 1983 aimed to stabilize Social Security
finances. Sponsors of the reforms targeted about 90 percent of wage and
salary earnings as income to be taxed, roughly the same percentage of
earnings that was taxed when the program began in 1937.
The system briefly hit that 90 percent target in the early 1980s. Then,
as the rich got richer, the percentage of earnings covered by payroll
taxes steadily declined. It dropped another 2.1 percentage points
between 2019 and 2022 to just 81.4 percent, to its lowest level since
the 1960s
<[link removed]>.
(Thanks to Josh Bivens of EPI for pointing this out.)
The difference between the current 81.4 percent and the 90 percent
target is almost $100 billion a year in lost Social Security revenue, a
figure that will only grow.
Every year, the income cap on taxable earnings is raised to compensate
for inflation. In 2023, because of the high inflation in 2022, the
income cap will be increased from $147,000 to $160,200. But this
increase is no match for widening income inequality, as more and more of
the nation's total wage and salary income goes to people who make a
lot more than $160,000.
There are a couple of fixes to this problem. We could get rid of the cap
so that all earned income is subject to Social Security taxes, as
Congress did with Medicare taxes in 1993. Even better, we could subject
capital income as well as wage income to Social Security taxes.
Even so, the payroll tax is a regressive tax. It's regressive in three
respects. It is levied on the first dollar of income with no exemptions
or deductions, in addition to failing to fully tax incomes of affluent
earners. And as a tax on payrolls, it increases the cost of creating new
jobs.
A more radical solution, proposed by the tax scholar Reuven Avi-Yonah
<[link removed]>,
would be to replace all or part of Social Security taxes with
value-added taxes. In general, liberals oppose VATs as regressive. But
Avi-Yonah's version would offset the regressive aspects in three
respects-with higher progressive taxes on high incomes; use some of
the VAT proceeds to finance Social Security and other progressive
outlays like universal health coverage; and use part of the VAT revenue
to reduce the payroll tax load and make remaining payroll taxes
progressive by ending the income cap and exempting the first $100,000 of
income.
Neither of these proposals is likely to be enacted anytime soon. But
when Republicans point to the Social Security shortfall (which is real)
and propose cuts in benefits, Democrats need compelling
alternatives-to embarrass Republicans and make the system financially
healthy in a progressive fashion. The easiest short-term fix would be a
big raise for workers.
~ ROBERT KUTTNER
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Q&A: Ro Khanna on the New Economic Patriotism
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The California representative has some ideas for how to broaden the
appeal of progressive policy. BY DAVID DAYEN
Europe Tries to Stop Exporting Its Emissions
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A new EU border tax on carbon could hurt low-income industrializing
countries, but 'green protectionism' is here to stay. BY LEE HARRIS
Is America Ready for a Universal Basic Income?
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Initial pilots are very promising, but more work needs to be done. BY
RAMENDA CYRUS
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