The Much Ado About Nothing? Post

For many years, there was a third rail of politics: Social Security. Simply put, don’t f*** with the Grey Lobby. They vote and they have money (and they don’t like it when you try to take it away). The stock market boom of the late 90’s came close to changing the calculus—giving seniors 20% annual returns on their money would be giving them more, not less, money. Clinton flirted with, but never really jumped onto, the privatization train. Bush on the other hand was a strong advocate of privatization—remember his complaints of how bad a deal a 2% rate of return is for seniors? Of course he forgot to mention that that was, essentially, a risk-free rate of return.

Turn the clock ahead to 2002, by which time 2% looked pretty good, and Republicans are running away from claims that they ever favored privatization of Social Security. Josh Marshall was pretty good on this one. So I think it’s pretty reasonable to say that messing with Social Security recipients’ income is once again politically dangerous. Think also of the variety of more recent references to how eliminating the dividend tax would benefit seniors.

What does this have to do with Consumption Taxes?

Social Security benefits are subject to less income taxes than other sources of income. There’s a very concise summary at Brookings; here’s the important part:

“Benefits are only subject to tax if this expanded income measure exceeds $25,000 (single) or $32,000 (married filing jointly). Above these thresholds, up to 50 percent of benefits are included in taxable income if the income measure is below $34,000 for singles or $44,000 for joint filers. For those with higher incomes, legislation enacted in 1993 increased the maximum inclusion rate to 85 percent of benefits…By design, more beneficiaries will be subject to tax over time. The Congressional Budget Office estimates that only about one-third of beneficiaries were taxed on at least part of their Social Security benefits in 2000.”

Eliminating income taxes on seniors would generate less savings for them precisely because they pay so much less in income taxes than the under-65 population. They do, of course, consume—that’s half of what retirement is about, right? (Presents for the grandkids counts as consumption).

I just don’t think the political will or audacity exists to implement this. Add to this the black-market problems that would surely arise with a combined federal and state tax that, conservatively estimated, would have to exceed 25%, and it’s a no-go.

Yes, a carefully crafted set of tax exemptions could alleviate the disparate impact that a consumption tax would have on seniors. Similarly, a well-crafted set of exemptions could also make a consumption tax progressive (CalPundit makes this point correctly). But, a few points are in order:

  1. Almost nothing about using exemptions in the consumption tax made it into the Economic Report of the President (on page 196, the authors mention possibly retaining favorable tax treatment of nonprofits)
  2. The only compelling case for a consumption tax is its theoretical simplicity. As soon as you start talking about favoring seniors, nonprofits, making the rate increase with the value of the sale, exempting some goods and services, applying regional adjustments to adjust for regional price and income variation, continuing to encourage the social goal of home ownership, favoring families with children, the popular R&D credits… it starts to look a lot like the current tax code morass.


P.S. Is it really much ado about nothing? I don’t think so. It’s telling that this proposal made it as far as it did. Now if I could just figure out what it tells me.

P.P.S. The fonts appear to be under control!