Lecture 22. TAX RATES & SOCIAL SECURITY

Lecture 22. TAX RATES & SOCIAL SECURITY
The deficit hawks will tell you that industry is not hiring 
because taxes are too high and there’s too much 
regulation.  But during WW II, with enough stimuli, they 
hired any warm body they could find when taxes were up to 
94% and all wages and prices were under strict control.
 
The reason industry is not hiring is clear: until consumers 
demand more goods and services, industry has more than 
enough capacity.  Industry is not hiring because 
consumers are saving for a rainy day.  And consumers are 
saving for a rainy day because industry is not hiring.  The
only way out of this vicious circle is massive (and much 
needed) government investment in infrastructure.
 
If entrepreneurs believed that there is a unfilled demand 
for their product or service, this is the perfect time to 
invest. They are sitting on almost $2T of cash and can get 
all the credit they need at an historically low interest 
rate.  With 10% unemployment and 20% underemployment, the 
labor market will never be cheaper.

Are they worried about the burden of historically low tax 
rates on a dubious profit? No! They are instead looking at 
much better investment opportunities in China and Brazil.
The moaning about taxes is pure ideology.
 
The deficit hawks will tell you that the only way to end
the recession is to cut taxes.  Yet, the Great Depression 
ended only when the the top tax bracket was 94% during 
WW II.

Many who opposed deficit spending for peacetime prosperity 
did not mind making fortunes with cost + 10% 
military contracts.  Deficit spending suddenly made perfect
sense after all.

During the 35 post-WWII years, we had strong growth, modest 
inflation, and low unemployment with top tax rates from 70%
to over 90% while the DR dropped from 122% to 33%.  Why? 
Stimulus! - as we explained in Lecture 11.

The Bureau of Economic Analysis found that out of 12 types 
of tax cuts, only three returned more than $1.20 per dollar 
cut while six failed to return the dollar.  All six types 
of spending increases returned more than a dollar and five 
of them returned more than $1.40 per dollar spent.

The neutral Congressional Budget Office has projected that, 
under current law, as the Bush tax cuts expire next year, 
we will return to Clinton's surplus-producing tax rates 
with debt stability for a generation.
UNCERTAINTY
The deficit hawks know exactly why industry is not hiring 
workers: uncertainty about interest rates, health care, tax 
policy, financial reform, carbon tax, and even default on 
treasury bonds.

Kevin Drum has de-bunked that in his Mother Jones
magazine article. Briefly, there is certainty that:

*Interest rates will remain very low for a very long time.

*PPACA (Health Care Law) has no impact on small businesses
 and only a minuscule impact on large businesses. Medium-
 sized businesses face a modest penalty if their workers 
 use federal subsidies to enroll in private insurance
 programs via the exchange. PPACA's rules don't take effect
 until 2014 anyway.

*The Bush tax cuts affected personal tax rates, not     
 business rates. The effect on small businesses would be 
 close to  zero.

*The financial reform effect is almost entirely restricted 
 to the financial sector.

*There is no possibility in the near future of a carbon  tax.

*There is no question about the federal government's long-
 term ability to meet its debt obligations, and even if 
 there were this would have very little effect on short-
 term  investment decisions by American businesses.

*The only significant real uncertainty now is whether there 
 will be enough consumer demand next year to justify hiring 
 more workers and buying more equipment today.
Uncertainty Forever
During George Bush's first five years, he approved No Child
Left Behind, the PATRIOT Act, McCain-Feingold, Sarbanes-Oxley,
the Homeland Security reorganization, Medicare Part D,
bankruptcy reform,and two big tax bills. He also tried and
failed to pass major changes to Social Security. And all this
was in addition to the usual background hum of agency
regulatory hearings and rulemaking changes — including a heap
of financial deregulation that eventually contributed to an
epic banking meltdown.

And yet, no one complained about regulatory uncertainty back
then. Why? Because the economy was growing. Businesses like
some regulatory changes and dislike others, but it's mainly
financial uncertainty that keeps them from hiring and
investing.
SOCIAL SECURITY
In 1983, the FICA tax was increased to provide enough 
funding for the “baby boomers” until 2047. But 
instead of being put in Al Gore's “lock-box”, 
the Trust Fund was co-mingled with general revenue and used 
to pay for ordinary expenses.

In the public's eyes and ears, the deficit hawks also 
conflated the fund with a “surplus” when they 
wanted a tax cut and with a “deficit” when they
wanted a spending cut. (Reagan got this brilliant advice
from his chief-of-staff and Wall Street Reaganonomist,
Donald Regan.)

In 1999, a slight surplus appeared in the annual budget. 
Whereas the surplus should have been used for the Trust 
Fund,  Bush demanded and got Congress to approve the 
“9/11” tax cuts . In effect, the Trust Fund was
looted to pleasure the rich. 

Republicans fought against Social Security before it became 
law and have never stopped fignting it. The most serious 
recent attempt to destroy it was Bush's 2005 
“privatization” scheme.

“...the longer you wait, the more difficult it is to 
fix.”, Bush said. “...this system of ours is going
to be short...about $11 trillion, unless we act... That's 
trillion with a T”.

A true scammer, Bush never named the date when that 
stupendous projected shortfall would occur nor did he 
explain how easily it could be avoided without handing over
a hundred million accounts to Wall Street brokers. The 
sheer dishonesty is startling.

And these guys never give up. The Bowles-Simpson report 
from the President's Deficit Commision has a suggestion for
“fixing” Social Security. In fact, Social 
Security has nothing to do with the deficit. By law, it is 
prohibited from ever spending more than it has collected in
payroll taxes and interest. It cannot possibly contribute 
to the deficit. 

Here are the facts:

1. Until 2017, the Trust Fund will collect more than it 
   pays out.

2. Until 2027, it will pay full benefits from payroll taxes
   plus interest on the principal.

3. Until 2037, it will pay full benefits from payroll taxes
   plus interest plus principal.

4. After 2037, if the law is not changed, only 78% of 
   benefits will be paid forever from payroll taxes. This,
   not $11 trillion debt, is the worst-case scenario.

5. The fund can be fixed forever by simply removing the 
   payroll tax cap for top earners. (Why was it capped? 
   Because Congress can be bought!) The details can be read in
   this Brookings Institute paper.

6. Alternatively, the 5.9% interest rate paid by the Treasury
   on the Social Security Trust Fund balance, established by
   Congress, can be increased by Congress enough to bring the
   balance up to its requirements.

   As described by Professor Robert Eisner of Northwestern
   University:

     "For those concerned, nevertheless, about the
      "solvency" of the trust funds, there are simple,
      painless remedies for this accounting problem....
      why not award balances in the Trust Funds, instead
      of the current 5.9 percent interest rate on
      long-term government bonds, [a] higher return...
      [for] it was not God but Congress and the Treasury
      that determined the interest rate to be credited on
      the non-negotiable Treasury notes of the fund
      balances."


7. There will now be another concerted effort to destroy 
   Social Security, at least for those under 55.  Turning the 
   Social Security Trust Fund over to the Wall Street casino 
   would be Russian Roulette en masse.

   This is a scam. In our society, we do not allow individuals 
   to die in plain view on the street. The homeless will be 
   cared for at taxpayers' expense. Those who gamble in the 
   Wall Street casino and lose will become a burden for the 
   rest. This is an attempt to destroy the social contract 
   upon which our society was built - all for the gain of
   Wall Street speculators.

To fulfill the promises made to those who paid and are 
paying the FICA (Social Security) tax, there are three 
possible solutions and combinations thereof:

1. Return the top federal income tax rates to the Reagan
   or pre-Reagan levels: i.e., put the burden on the
   well-off, the sector that looted the Trust Fund.

2. Increase / remove the FICA payroll tax cap: i.e., put 
   the burden on the well-off, the sector that looted the 
   Trust Fund.

3. Increase the FICA tax rate and/or decrease benefits: 
   i.e., put the burden on the FICA Tax payer and seniors.

Guess which alternative Congress will consider!
Proceed to:
Lecture 23. HEALTH CARE 
Thanks for your interest.
  Marvin Sussman, retired engineer

If you don’t like the world as it is, change it this way!: 
1. Depress the Shift Key,
    sweep the cursor over the following URL,
    click, copy, and paste it on email to friends,
    and ask them to do the same:

     Keynesian Economics 101
     The ONLY way out of this mess     
     Free lectures on-line:
     KeynesForum.blogspot.com
2. To print and distribute single-sheet “invitations”
 to  this site, click here
 and ask your friends to do the same. 
3. To donate toward advertising this website,
 click the yellow “Donate” button below.

You will be asked for your PayPal account password.
If you  don't have a PayPal account,
 you will need a credit card. 
    
And ask your friends to do the same. 
Copyright © 2011 Marvin Sussman All rights reserved.