News Flash: Federal Taxes Have Plummeted

David Cay Johnston reported this a few weeks ago and I almost missed it.  It’s particularly relevant, though, what with official Washington talking about how to cut spending, restrain the deficit, etc. (at least attacking the English language with euphemisms about war in Libya).

Let’s recap what Washington, especially Republicans, have been saying (from Johnston’s article):

Notice these almost identical quotes from the Sunday morning talk shows five days after the midterms:

    We don’t have a revenue problem. We have a spending problem.
— Senate Minority Leader Mitch McConnell, R-Ky.
    Washington does not have a revenue problem. It’s got a spending problem.
— House Majority Leader Eric Cantor, R-Va.
    We do not have a revenue problem. We have a spending problem.
— House Budget Committee Chair Paul Ryan, R-Wis.
    I think it’s not a revenue problem; it’s a spending problem.
— Sen. Rand Paul, R-Ky.

As framed, these advertising lines are matters of opinion, but how many Americans recognize them for what they are — opinions, not facts?

When these people talk about taxes at all, they claim that tax rate cuts actually raise tax revenues and grow the economy.  Unfortunately the facts don’t bare that out.  In fact, tax rate cuts result in lower tax revenues.  In plain terms, tax rate cuts create deficits.  If you add a recessions to the mix, you get even lower tax revenues and bigger deficits because unemployed people don’t pay much tax.

Johnston points out, using officially released data, that we’ve had an excellent test of this assertion that “tax rate cuts grow the economy and create more tax money”.  In 2001, at the beginning of the last decade, the Bush administration pushed through a very large cut in tax rates for both high-income individuals and for corporations.   I’ve already mentioned how this has allowed General Electric to avoid paying taxes despite billions in profits. But that’s just one corporation, albeit a very large one.

How have people overall done?  Are we over-taxed as the TEA Party folks claim?  Have taxes been rising?  The answer is a very clear: NO. Despite real GDP being 17.62% higher in 2010 Q4 than in 2000 Q4., total federal tax revenues are down.  That’s why we have a huge deficit.

Federal tax revenues in 2010 were much smaller than in 2000. Total individual income tax receipts fell 30 percent in real terms. Because the population kept growing, income taxes per capita plummeted.

Individual income taxes came to just $2,900 per capita in 2010, down 36 percent from more than $4,500 in 2000. Total income taxes and income taxes per capita declined even though the economy grew 16 percent overall and 6 percent per capita from 2000 through 2010.

Let me repeat that.  Individual income taxes per person in the U.S. are down 36 percent in 2010 vs. 2000.  Now you may be skeptical.  You may be thinking, I dont’ think my taxes are down.  You may be right.  That might be because you’re in the lower 1/3 or so of income earners who only pay payroll taxes (Social Security, Medicare) but don’t pay income taxes.  You can’t pay lower than zero.  The people who pay the bulk of income taxes got the rate cuts.  Did they respond with such increased effort that incomes rose and they still pay more tax dollars at the lower rate (this is what Laffer-curve oriented Republicans claim)?  No. They pay less tax now.

But it wasn’t only high income individuals who benefitted from the generosity of Bush and the Republicans in 2001 (and again by both parties in 2010), corporations also benefitted. In particular, large multi-national firms benefitted. So what happened to the tax revenue they pay?

Corporate income tax receipts fell 27 percent and declined 34 percent per capita, even though profits boomed, rising 60 percent.

Johnston does note that payroll taxes, the taxes that workers pay for Social Security and Medicare did increase during the decade.  But these are taxes paid by all workers on income up to only $106,000.  The same politicians who falsely claim that income tax rate cuts increase revenues are in fact trying to use the deficits created by too-low income tax revenues as an excuse to cut Social Security benefits for those very workers who stepped up to the plate and paid their taxes.

There’s more damning evidence against both the politicians that perpetuate these false ideas that “tax cuts raise revenue” but also against the economists and pundits who repeat it despite the facts.  I urge the interested reader to read the whole article at:

http://tax.com/taxcom/taxblog.nsf/Permalink/UBEN-8EL2Y8?OpenDocument

From the Wall St Journal via Yves Smith at nakedcapitalism.  Self explanatory.

Even Tea Party Members Do Not Support Cutting Social Security

It seems that the efforts of the austerians to cow the public into cutting Social Security and Medicare are not getting traction. And Tea Party adherents are breaking with the Republican party line on this issue.

From the Wall Street Journal:

Less than a quarter of Americans support trimming Social Security or Medicare to tackle the country’s budget deficit, according to a new Wall Street Journal/NBC News poll that illustrates the challenge facing lawmakers seeking voter support for altering entitlement programs.

The poll, conducted between Feb. 24 and 28, found strong opposition for cuts to these entitlement programs across all age groups and ideologies. Even tea party supporters, by a nearly 2-to-1 margin, declared cuts to Social Security “unacceptable.”….

The survey also found a sharp uptick in desire for the government to do more “to help meet the needs of people.” Just over half of people in the survey backed more government involvement, the highest percentage since February 2009, just after President Barack Obama’s inauguration.

Hhm….Obama is moving to the right as the country is moving to the left. But, as Tom Ferguson first described in his book Golden Rule and has since become blindingly obvious, powerful investors dominate party politics. Thus unless the trend towards a positive view of government promoting social aims progresses, it won’t affect the state of play in the Beltway.

 

Social Security Under Attack By Media

I will repeat:

  • Social Security is NOT in financial trouble.
  • Social Security does NOT contribute in any way shape or form to the U.S. Federal government’s deficit, now or in the future. It cannot.  If anything, it has enabled a coverup of how big the real deficit has been for years.
  • News media does not critically examine any claims asserted by the big-money folks that want to abolish, cut, or destroy Social Security (see here).

Remapping Debate along with Mark Miller document how the news media mindlessly attacks and asserts that Social Security is a deficit problem even though that claim is false. In the course of explaining, they also do an excellent job of explaining how the trust fund has operated.

Kudos to Mark Miller, a contributor to Reuters’s Prism Money blog, for his post Monday morning calling out NPR, the Associated Press, and NBC’s David Gregory for perpetuating the misleading idea that Social Security is one of the key drivers of the federal deficit.

The experts who study these things believe that, thanks to the trust fund, Social Security has enough money saved up to meet its obligations for about the next 25 years.

Thanks to the energetic efforts of deficit hawks, the notion that Social Security is a leading cause of the deficit has become part of the Beltway consensus. But, as Miller — who’s been pounding this drum for some time — points out, “the consensus is wrong, and so is much of the reporting” on this topic.

Here’s the actual situation: in the early 1980s, when Social Security was facing a short-term financing crisis, a commission chaired by Alan Greenspan recommended a variety of adjustments to the program. Those tweaks, coupled with decent economic growth, resulted in a situation in which over the ensuing decades Social Security collected more money in payroll taxes than it paid out in benefits.

Rather than just put those surplus funds in a bank vault, the trustees who run the Social Security Administration took this money — it’s known as the Social Security Trust Fund — and invested it in bonds issued by the U.S. Treasury. In effect, over the course of nearly 30 years they lent money to the rest of the government. This was good for Social Security, because it made a little extra money on a very safe investment; the U.S. government, after all, doesn’t default on its debt. And it was good — or seemed good, anyway — for the rest of the government, which got in the habit, especially during the 2000s, of paying for new programs and overseas military adventures with borrowed money.

One consequence of this process is that the trust fund grew quite large: it’s now about $2.5 trillion. Another consequence is that the federal tax burden shifted away from income taxes — which are progressive, so that people who earn more money pay a higher rate — toward payroll taxes, where every worker pays a flat rate up to about $106,000 in earnings (amounts above that cap are not subject to the payroll tax, so the more money you earn, the lower your payroll tax rate is).

Today, for a variety of reasons, Social Security’s annual obligations have started to exceed payroll tax collections. (This was entirely expected, though it happened a bit earlier than anticipated thanks to the recession.) In a narrow sense, that’s a “deficit.” But what journalists and politicians usually mean by “deficit spending” is a government borrowing money to pay its bills. Social Security just needs to collect on the loans it has made. And the experts who study these things believe that, thanks to the trust fund, Social Security has enough money saved up to meet its obligations for about the next 25 years. So there is no real “Social Security deficit” over that period.

To the extent that Social Security has anything at all to do with the deficit, it is the fiscal imprudence of past White Houses and Congresses, not America’s commitment to present and future retirees, that is to blame.

What about after that point? Once the trust fund is spent, if there are no other changes to the program Social Security will continue to owe more than it collects. (As Miller notes, the fixes necessary to avoid this situation are modest, and do not have to include benefit cuts.) But even then, the trustees could not borrow money to make up the difference: by law the program, on net, can never have spent more than it has taken in. “As a result,” a recent paper from the Economic Policy Institute stated, “Social Security cannot and would not add to the federal deficit when its trust fund is exhausted.”

So where does all the deficit talk come from? The problem, of course, is that the Treasury does not have the cash on hand to repay what it borrowed from Social Security, and making good on those obligations will require cuts to other areas of the budget, more revenue from income taxes, or further deficit spending. It is this fact that leads many commentators — including some politicians who are generally supportive of Social Security — to link the program to the deficit.

But that problem wasn’t caused by Social Security, which has always operated in long-term balance and, unlike Medicare, faces very modest challenges in the fairly distant future. It was caused by a federal government that, with the exception of a portion of the Clinton years, was unprepared to fully fund federal programs through tax levels sufficient to pay the bills, and instead used borrowed funds to paper over the shortfall. To the extent that Social Security has anything at all to do with the deficit, it is the fiscal imprudence of past White Houses and Congresses, not America’s commitment to present and future retirees, that is to blame.

As Miller notes, this isn’t actually that complicated. But there’s an irony to his latest post correcting the record on this subject coming out Monday morning. That’s because President Obama’s 2012 budget proposal came out at almost exactly the same time, and the flurry of coverage it prompted included many more assertions that Social Security is one of the key drivers of the deficit.

Like this, from MarketWatch:

And some 800-pound gorillas are also missing: reducing funding demands for Social Security, Medicare and Medicaid — the source of huge projected deficits in coming years.

Or this, from Politico:

But, [Hoyer] said, they’ll insist they be coupled with reductions in the Pentagon budget and a serious attempt to rein in spending on Medicare and Social Security, two of the major reasons for the explosion in the deficit that will get worse as the baby boomers retire.

Or this, from The Washington Post:

A senior administration official said Obama’s budget request maps “a sustainable path” that would stabilize government finances in preparation for a broader debate about how to tackle the biggest drivers of future deficits: Social Security and health care for the elderly, as well as a tax code that offers more in breaks and deductions than it collects in revenue.

It looks like Miller will have more fodder for another post soon.

 

Social Security Helps Seniors Live Longer

Interesting piece of research on Social Security and Mortality.  Using sophisticated econometric techniques, researchers at New York Medical College find that social security improvements and benefits are linked to longer life spans.   So rather, than lengthening lifespans being a supposed independent cause of social security financing issues, it may be that SS itself has helped lengthen lifespans.  The alert:

Study links social security improvements to longer life span

When benefits are improved, older people benefit most

New findings from researchers at New York Medical College suggest that when Social Security benefits are improved, people over the age of 65 benefit most, and may even live longer.

According to a new study published in the Journal of Public Health Policy, Americans over the age of 65 experienced steep declines in the rate of mortality in the periods that followed the founding of and subsequent improvements to Social Security. The authors urge that as Congress and the President discuss changes to Social Security they consider the benefit of reduced mortality and improved health among older Americans.

“Social Security and Mortality: The Role of Income Support Policies and Population Health” will be published online in the Journal of Public Health Policy on February 17, 2011.

“The political discourse around Social Security focuses exclusively on the system’s long-range financial problems rather than on the benefits of improved health and reduced poverty,” said Peter Arno, Ph.D., the study’s lead author and professor and director of the doctoral program in the Department of Health Policy and Management of the School of Health Sciences and Practice at New York Medical College. “If Social Security is put on the chopping block, lawmakers will jeopardize the most important safety net for America’s elderly.”

Arno—whose work is funded through a Robert Wood Johnson Foundation® Investigator Award in Health Policy Research—and his colleagues analyzed the effect of Social Security on mortality over the course of the 20th century. After controlling for factors such as changes in the economy, access to medical care, and Medicare, they found that although mortality rates for all adults fell during the 20th century, rates of decline for those 65 and older changed more than 50 percent in the decades following the introduction of Social Security in 1940. Rates of decline for the younger age groups remained virtually the same during this period. The trend was particularly pronounced following marked improvements in Social Security benefits between the mid-1960s and the early 1970s.

This finding supports earlier studies that have demonstrated that beneficiaries with higher lifetime earnings experienced lower mortality rates, and that higher supplemental security income benefit levels reduced mortality and disability for those recipients. Improved health status among elders could have other fiscal impacts, including lower Medicare costs.

Many policy-makers are proposing cuts to Social Security benefits as a way of addressing long-term federal budget deficits. “If policy-makers are going to have a well-informed discussion on Social Security, it is critical that they fully appreciate the program’s role in improving the health and well-being of our nation’s elderly,” says Arno. “By not considering the benefits of reduced mortality and poverty reduction, policy-makers are grossly underestimating Social Security’s benefits to society.”

Contact: Donna E. Moriarty, M.P.H.
donna_moriarty@nymc.edu
914-439-5989
New York Medical College

 

I Repeat: Social Security Is *Not* the Problem

I’ve observed it before, but it deserves repeating.  Social Security is NOT the cause of any present or future Federal government deficits. Social Security is NOT financially troubled. Social Security IS financially sound.  To the extent the Federal government has a deficit problem (which in reality is much less than people think, but that’s another topic), it is not due to Social Security. Mark Thoma says it clearly:

Barking Up the Wrong Tree: Social Security is *Not* the Problem

Ss784
[Source: CBO]

Though there seems to be a concerted effort to get people to believe otherwise, Social Security has very little to do with our long-run budget problem.

I think a couple of the comments that Mark received on this post also shed some light on why we’re told we need to cut Social Security:

reason said…

The only people with a serious interest in undermining SS are Wall Street. They should be hung, drawn and quartered. Political reform is desperately needed in America (as is an informed, critical public and more transparence – but one thing at a time).

bakho said in reply to reason

Great Graphic. This graphic should be posted once a week and used as widely as possible to educate the media and the politicians.

SSTF is a huge pot of money. Wall Street salivates at the thought of collecting fees on $Trillions in long term investments.

 

Defense Spending Myths

Talk is ramping up in Washington about the need to cut Federal government spending despite the facts that total government spending in the U.S. is already declining due to draconian cuts at the state and local levels. And the talks persists despite the presence of 10% unemployment (or near it) with no foreseeable decline given current policies.  The talks have even stretched to the idea of cutting Social Security despite the fact that Social Security is fiscally sound for the next 30-40 years on it’s own.

So if Social Security is in budget-cutter’s sights, so also should we consider military spending which is at least as great and arguably larger than Social Security.  I say at least as great since both the Dept of Defense and Social Security payments account for approximately 20% of total federal government spending.  Of course the tax source dedicated to Social Security also accounts for much, much more than 20% of federal revenue while the Dept of Defense has no dedicated tax source.  I say arguably greater than Social Security because the Dept of Defense budget doesn’t really capture what we spend on military and quasi-military spending.  Most other industrial nations account for military spending under a single budget entity or organization, but not the U.S.  The U.S. treats the costs of caring for veterans as something non-military related in the Dept of Veterans Affairs (as if veterans just descend from outer space unrelated to our history of paying them as soldiers). We don’t fully account for our nuclear weapons in the DOD – they’re in the Dept of Energy.  We don’t count Homeland Security – it’s another growing-like-topsy Department on it’s own. We don’t even count spending on war as part of the Dept of Defense – most of the Iraq and Afghanistan Wars were funded by special acts of Congress that weren’t included in the DOD budget.

But the true size of the Defense Dept budget is only one myth.  There are many others.  The Washington Post highlights five of the most common in an article titled 5 Myths About Defense Spending.

Another Social Security Myth Busted

Critics of Social Security and those who claim to support it but really want to cut benefits (despite SS being fiscally sound) often expound myths about Social Security to make it sound like a program doomed from the start.  They often call it a “Ponzi Scheme” despite SS’s dynamics not being at all dependent on exponential increases in members the way a Ponzi Scheme does.

Well, another myth that gets circulated is that the extension of longevity in recent generations, the so-called “graying of America”, was never foreseen by the creators of Social Security.  The implication, they say, is that SS has to pay too many benefits for too long to too many people.  This myth, as they say on TV, is BUSTED.  I’ll let Paul Krugman, following research by Bruce Webb, do the talking:

Well, it turns out that Table 9 in the 1945 report (pdf) shows high and low estimates of the population distribution looking forward as far as 2000, which we can compare with the actual population distribution in 2000.

What you can see right away is that the SSA expected a much smaller population than we actually ended up with — the baby boom and immigration weren’t anticipated. But they also expected a somewhat older population than we actually got: their “low” estimate put the ratio of seniors to adults under 65 at 20.8%, almost the same as the actual 21.1%, while the “high” estimate put the ratio at 29.1%. That is, in 1945 the Trustees thought that America would probably be a grayer, older country by 2000 than it actually ended up being.

via Early Social Security Projections – NYTimes.com.

So way back in 1945, less than 8 years after the program started, the Social Security trustees looked into their crystal ball and foresaw a much older America in 2010.  The reality is Social Security System works and is solvent. It does not contribute to the U.S. federal government deficit. But, of course, for people who object to any type of government program (except defense, of course) facts are not a barrier.