Go Bulldog!

by Don Boudreaux on July 28, 2008

in Social Security

The Cato Institute’s Dan Mitchell has a nice video analysis of Barack Obama’s proposal to raise Americans’ Social Security taxes.

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{ 14 comments }

Martin Brock July 28, 2008 at 8:47 pm

Social Security is already like a redistributionist welfare program, not an earned benefit, so I don't think much of this "let's not make Social Security redistributionist by further taxing the wealthy" argument. The supply side argument is sound enough without this chicanery. Social Security benefits are not remotely related to any capital purchased by the taxes paid.

Martin Brock July 28, 2008 at 9:06 pm

The more I hear of this argument, the less I like it. "Obama's plan, by significantly weakening the relationship between taxes paid and benefits received, would undermine one of the key principles that Franklin Roosevelt wanted when he first created the program."

Right. Dan Mitchell's heartfelt reverence for the memory of Franklin Roosevelt brings tears to my eyes.

The only relationship between Social Security taxes paid and benefits received is a quasi-fascist, pseudo-capitalist, statutory benefit formula. In reality, the taxes paid finance the consumption of unproductive people waiting to die, not any capital that could ever provide the taxpayer any benefit. The capital taxed is largely the product of parental investments and other investments in the labor of children and has nothing whatever to do with past Social Security expenditures.

Furthermore, Franklin Roosevelt well understood this fact.

Nothing irritates me more than political apologetics for the state from nominal "libertarians".

Methinks July 28, 2008 at 9:35 pm

Don,

Thanks for posting this great video.

Jeremy H. July 28, 2008 at 9:41 pm

Mitchell is not correctly identifying Obama's position, as the Tax Foundation has pointed on many of Obama's tax proposals:

"While Obama may have waffled on this issue a few months ago, details have emerged from the campaign indicating that he would only raise the payroll tax (combined employer/employee) by 4 percentage points, as we blogged on earlier this month. Again, this doesn't make it a good policy necessarily, but the facts need to be set straight."

Methinks July 28, 2008 at 9:45 pm

Martin,

I just thank God that Roosevelt understood anything at all. Look, you're not going to get rid of social security (despicable as it is), so you might as well not piss all over "the opposition" in trying to convince them that more taxes are bad. It's called tact and respect for other people's positions. Personally, I'm a fan of neither but that's why I'm unsuccessful in making friends and influencing people.

Methinks July 28, 2008 at 9:52 pm

(combined employer/employee)

As long as we're setting facts straight: That's a fake distinction. The tax is borne solely by the employee. Your post and link do not dispute Mitchell's claim that Obama wants to impose the tax on incomes above $250K.

cpurick July 29, 2008 at 8:27 am

Since the "over $250K" crowd includes a lot of small business owners, aren't many of these taxpayers paying the "employer's share" of all their employees' contributions already?

And while I understand how the whole thing really works, I'd bet that someone who'd fall for Obama's nonsense might have a problem with that.

Jeremy H. July 29, 2008 at 10:02 am

Methinks,

The tax is borne solely by the employee.

That's a very naive reading of tax incidence, assuming a perfectly inelastic supply of labor.

While surely some of the burden is passed on to employees, I'm not aware of any studying show that the employee *solely* bears the burden (but I'd love to see one, as it would back up a nice libertarian talking point).

cpurick July 29, 2008 at 10:14 am

It's borne by the employee because it's tied directly to employing him, and is necessarily part of the equation used to determine whether adding an employee is a profitable action. It's not profitable to hire unless the gains from adding the employee cover the cost of his payroll match.

Bryan July 29, 2008 at 3:53 pm

Question: Everything else being equal, wouldn't a flat payroll tax be preferable to our current regressive payroll tax?

Martin Brock July 29, 2008 at 6:35 pm

That's a very naive reading of tax incidence, assuming a perfectly inelastic supply of labor.

I agree with Methinks. The "employer's share" of the payroll tax is clearly a cost of employing a worker and nothing else to the employer. I don't know what the elasticity of the labor supply has to do with it.

Is an "employer's share" of an employee's health insurance premium not part of the employee's compensation? I certainly figure it that way when considering offers of employment. What about income taxes withheld? What part of these taxes are "the employer's share"? Any part the Federal government declares? If we declare tomorrow that income taxes withheld are "paid by the employer" and remove all accounting requirements for wage earners, what has meaningfully changed?

Martin Brock July 29, 2008 at 6:47 pm

Question: Everything else being equal, wouldn't a flat payroll tax be preferable to our current regressive payroll tax?

Depends on what you prefer. Mitchell has a point about the supply side implications of adding 15% to the tax burden of everyone with an income over $250,000. He should stick to this argument and skip the disingenuous apologies for the Social Security status quo.

Raising the payroll tax cap or applying the tax to income over $250,000 doesn't make the system any better in my way of thinking. I don't know how much worse it makes the system, in terms of its macroeconomic effects, but I suspect that people in this income category can find ways to convert their wages into forms of income not subject to the payroll tax, so I'm extremely skeptical of any alleged revenue windfall from this maneuver.

I do know that raising the payroll tax rate for all taxpayers is absolutely unacceptable to me. The Social Security reforms that I favor will never be enacted, but I'm not therefore obliged to pretend any allegiance to the system as it is.

Methinks July 29, 2008 at 7:10 pm

Jeremy H.,

What Martin and cpurick said. If the tax did not exist, the money currently spent on the tax to employee the employee would be available to offer as wages.

cpurick July 30, 2008 at 11:24 pm

We can consider this incidence by asking what would happen to the money if the tax went away. And I think it would go to employees either way.

If elasticity was such that the employees could demand the liberated tax, then they will demand it and the employer will pay it because his cost for the same labor does not increase.

But if elasticity permitted the employer to keep the tax, then that would mean he suddenly makes more money off each dollar spent on labor, and economic theory holds that he would be compelled to buy more labor under the new arrangement until equilibrium is reached at the point where there's no more profit in additional hiring.

Either way, the surplus goes to labor.

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