Tax Reform Proposal #1: Eliminate Social Security and Medicare Taxes

In last night’s State of the Union address, President Obama had a lot to say about “fairness” in the tax code.  I must admit that I don’t know too much about “fairness.”  My kids talk about it sometimes, at least the younger ones do.  It goes like this, “that’s not fair!”  Which, when properly translated, means “that didn’t go the way that I wanted it to go.”  My feeling is that President Obama’s populist, tax-code fairness statements are just more sophisticated versions of the way little kids use the word.  So, translated, his statements go something like this, “the tax code just isn’t set up the way that I want it to be set up!”

So much for fairness as a standard as far as I am concerned.  Fairness is in the eye of the beholder.  It is an unworkable as a standard for policy because it is too subjective.

I would propose instead honesty and justice[1] as standards for tax reform.  Our tax system is enormously unjust and egregiously dishonest.  Thus, I am going to offer a few proposals that would make the tax system more honest and transparent.  My hope would be that this honesty would rather quickly lead to calls for more justice.  You know, a “sunlight is the best disinfectant” type of thing.

First then, let’s begin with the payroll tax reduction.  (This is a good place to start since President Obama mentioned it last night and he somehow was able to use it as the end of the year to paint the Republicans as the party of tax increases!  Yikes!)  The President’s suggestion is that we extend the current payroll tax reduction for an entire year.  If that is the best that we can do, I would go for it.

But, if I had my way, rather than just temporarily reducing the Social Security portion of payroll and self-employment taxes or offering rebates or the like, I would just eliminate the Social Security and Medicare taxes altogether.  Now, this is a different issue than whether Social Security and Medicare as programs should be eliminated, and, if so, what the time table for such an elimination would be.[2]  Remember, the issue here is not proposals with regard to government programs, the issue is transparency and honesty and honesty in the tax code.

The Social Security and Medicare taxes are disingenuous at best.[3]  Theoretically, these taxes were supposed to be paid into a special account where they were maintained separately as a “trust fund” so that money would be there for retirees currently working who have yet to enter the system as beneficiaries.  This is, of course, a joke.  There is no account with all of the excess Social Security and Medicare taxes sitting in it just waiting to be withdrawn.  It is more like a big basket with a bunch of IOUs in it.

Still, even that may be generous.  A more accurate statement would be that Social Security and Medicare tax receipts disappear somewhere in the sucking black hole that is the United States Federal Government.  The Federal Government’s books are outrageously jumbled and confused.  If a publicly traded company ran its accounting like the US Government does, the SEC would prosecute the officers and directors and put them in jail for fraud.

Therefore, I would eliminate the Social Security and Medicare taxes in order to be more honest with people.  There is no Social Security and Medicare trust fund.  You did not save money up like a 401(k) by paying Social Security and Medicare taxes.  Rather, it was just another creative and sneaky way for the Federal Government to fleece you by taking money from you now and promising you and millions others benefits that can never be delivered.  In a word, it is dishonest.  It’s tax prestidigitation.  Accordingly, we should stop lying, do away with Social Security and Medicare withholding taxes, and make the Federal Government be honest about the tax rate that it is actually charging the American people.

Social security and Medicare taxes are essentially additional income taxes.  Thus, it is more honest to just eliminate that and lump them in with the other income taxes and ongoing expenditures.  That is really what we are doing in practice anyway.  This will be unpopular because it will add to the effective income tax rate that all Americans pay, but it would satisfy those who worry that we should pay for tax decreases as we go along rather than adding to the deficit.  Further, when people see what they are actually paying, they will likely clamor a little louder for real tax reform.

In addition to being dishonest, Social Security and Medicare taxes are enormously regressive.  They fall the hardest on low-income earners.  Therefore, eliminating these taxes should be something that everyone can get behind.  (As both big-government liberals and small-government conservatives should agree that regressive taxes are fundamentally unjust.[4])

Thus, in conclusion to state it clearly, I would make honesty and justice my priorities for tax reform.  I would therefore eliminate the payroll taxes because they are fundamentally dishonest.  I would be fine to just eliminate them and make corresponding cuts in Federal Government spending (perhaps in the programs themselves.)  However, if that proved untenable, I would be willing to compromise and just add them on to the current income tax system.  It would take a little math and some amendments to the income tax code, but it could easily be done with the salutary result of having a much more honest and transparent tax system.

[1] Of course, we would then need to define justice.  That said, we have a rich history of attempting to define that word in Western civilization.  From the Bible to Aristotle to Aquinas to the Puritans to the Founders, lots of brilliant people have thought about what that word means.  That said, whatever the definition of justice, it would not be so subjective as “fairness.”

[2] Two issues immediately come to mind with regard to the Social Security and Medicare programs themselves.  First, what is the proper role of government?  Should government be involved in these types of social programs at all?  Second, if the answer to the first question is “no,” then what about the people who have detrimentally relied upon the Federal Government’s promises to take care of them when they get older?  I think we would need to consider whether we have obligated ourselves as a people to these folks and therefore are morally required to make some type of payment to them.

[3] I think other taxes should probably be added to this list as well.  Unemployment taxes immediately come to mind.  As the recent extensions of benefits, etc., demonstrate, this likely another deceptive tax that should be treated more honestly.  Further, it is imposed upon businesses, making it even more deceptive.  How?  It doesn’t show up on W-2s, etc., but rather it shows up in the price of goods and services that these businesses sell.

[4] For example, the Bible is very clear that we should not have one rule for rich people and another for poor people.  Further, it is very clear that we should not oppress poor people, but neither should we give them special advantages in the legal system.  A big part of justice is one rule applied for all.  See, e.g., Exodus 23:1-9; Leviticus 19:15; and Deuteronomy 1:16-17.