By Geier, Deborah A.
Publication: Virginia Tax Review
Date: Saturday, June 22 2002
자료: Integrating the tax burdens of the federal income and payroll taxes on labor income
V. LINKING FUTURE BENEFITS TO TAXES PAID: IS THE PAYROLL TAX ACTUALLY A "DOUBLE TAX" ON LABOR INCOME?
To the extent that payroll taxes are not really "taxes," the "double tax" (or high tax on labor income) fairness critique with respect to middle- and lower-class labor income disappears. As more fully described below, some economists have implicitly argued that the payroll taxes are not actually "taxes" to the extent that they purchase an equivalent amount of future benefits personal to that particular taxpayer. Further, politicians have been quick to jump on such implications. Senator Phil Gramm, for one, said that a payroll tax cut is tantamount to "giving a tax cut to people who do not pay taxes." (94) One of the key issues that must be resolved in determining the propriety of integrating the two taxes on labor income, therefore, is the question of whether payroll taxes paid with respect to a particular worker are properly viewed as purchasing future retirement and health benefits for that worker and are thus not a "tax." I ultimately reject this approach. While studies examining the tax paid and benefits received by various demographic cohorts can provide helpful information in designing the tax-and-transfer system and in predicting funding needs, their approach (if taken literally) fundamentally mischaracterizes the Social Security system.
In measuring tax burdens, some economists assert that the marginal payroll tax rate should be calculated by reducing the legislated rate to take account of the present value of the future old-age and survivors benefits expected to be received under the Social Security system upon retirement. As Mitrusi and Poterba phrase it, "From a life-cycle perspective, the marginal burden of the social security payroll tax on an individual's current earnings is not the current marginal rate, but rather this marginal rate net of the marginal increase in the present value of future program benefits that flows from higher current earnings." (95) Or, as Burkhauser and Turner stated, "When a marginal dollar of wage earnings yields an increase in future social security benefits, this offsets the stated payroll tax on that dollar." (96)
This analytical approach reveals that those retiring in the present (as well as in the past) will--as a group--receive far more in benefits than they paid in payroll taxes, and thus their marginal payroll tax rate during their working lives was low or negative. Those retiring in the not-distant future, however, will increasingly face higher and higher marginal payroll tax rates. For example, Burkhauser & Turner state:
In our calculations, we show that for retired workers aged 65 in 1982, the increase in the present value of social security benefits associated with an additional dollar of covered earnings at younger ages exceeded the additional social security taxes paid on those earnings. Thus, for workers who anticipated future benefits, social security acted at the margin as a wage subsidy rather than as a tax. This situation will not continue for younger workers now in the system. It is likely that for many workers born after World War II, the true payroll tax will operate as a tax throughout life, although at less than the legislated rate. (97)
As the quotation above indicates, Burkhauser and Turner thus characterize as a true "tax" only those payments that do not bring a directly related individual benefit, as opposed to the more diffuse benefits realized by society as a whole when general tax revenues are spent for the common good (i.e., for such goods as defense, our federal court system, etc.).
Others reach similar conclusions. The Congressional Research Service recently released a report that examined "the value Social Security provides each generation of workers in relationship to the Social Security taxes they pay." (98) It concludes:
Under the economic assumptions most commonly used by the Social Security Trustees and congressional policymakers, a worker who always earned the MINIMUM WAGE, who retires at age 65 in 2001, and has a dependent spouse will recover the value of the RETIRMENT PORTION of his or her [Social Security] taxes plus interest in 3.4 years; the payback times for a similar worker retiring in 2010, 2020, and 2030 are projected to be 3.9, 4.1, and 3.9 years, respectively.
In 1980, it took 4.4 years for a worker who always earned the Social Security MAXIMUM WAGE, and who retired at age 65 with no dependent spouse, to recover the value of his AND HIS EMPLOYER'S [Social Security] taxes plus interest. The payback period for a similar worker retiring in 2001 is 37.7 years, and in 2030 will be 102.6 years.
For workers with no dependent spouse retiring at age 65 in 2030 who always earned an AVERAGE WAGE, at a 1% real interest rate they would recover their and their employer's [Social Security] taxes in 15.1 years; at 2% in 22.1 years; and at 3% in 33.6 years. However, at 4% and higher real interest rates, the payback times become virtually infinite, i.e., the taxes would never be recovered. (99)
Stated a different way, Steuerle and Bakija conclude that "a high-/averagewage two-earner couple turning 65 in 2030 faces net taxes or negative transfers of approximately $173,500 . . .; their benefits will be worth about 74 percent of their contributions." (100) And stated in yet another way, Caldwell et al. conclude that people born in 1995 and later would enjoy a rate of return approaching zero, meaning that they "would barely get back what they put in, making the program akin to a mandatory zero-interest long-term savings account or to a program that transferred about 80 percent of their tax contributions to members of older generations and then invested the remaining 20 percent at a market interest rate." (101)
Mitrusi and Poterba reach similar conclusions on the numbers, and they also report how many taxpayers in each income spectrum have a higher marginal payroll tax rate than marginal income tax rate if the stated payroll tax rate is adjusted for net future benefits to be received under the Social Security system. (102) They conclude:
While the fraction of families in the lowest income category (less than $10,000 per year) for whom the marginal payroll tax rate exceeds the marginal income tax rate is still substantial (44.6 percent), for most other income groups this probability drops sharply. For all families, there is only a 9.2 percent chance that the net-of-benefits payroll tax rate exceeds the marginal personal income tax rate. For families with adjusted AGI above $20,000, the chance that the net-of-benefits payroll tax rate exceeds the income tax rate is very low. This very substantial change in part reflects the fact that small reductions in marginal payroll tax rates, beginning at a level of 15.3 percent, bring many families across a key threshold--the 15-percent income tax bracket. Small changes therefore change their payroll tax rate from greater than to less than their income tax rate. (103)
Like many generally stated statistics, these results can, however, take on an aura of solidity in general discourse that masks their inherent and deep uncertainties.
Not only do analysts disagree on the proper techniques to use in making calculations, there are often fundamental disagreements involving subjective factors: what work patterns to use; what part of the Social Security tax to count; whether or not to include dependents' benefits; whether or not to include the employer's share of the tax; what rate of interest to use; and whether or not to include the effect of income taxation of benefits. (104)
As one example, variations in the interest rate used to calculate the "return" on payroll taxes have huge effects on the results.
For example, workers retiring at age 65 in 2030 who always earned the average wage would recover the retirement portion of their and their employer's [Social Security] taxes in 11.9 years at a 1% real [i.e., above inflation] interest rate, in 16.1 years at a 2% real interest rate, in 23.5 years at a 3% real interest rate, and 44.4 years at a 4% real interest rate. At a 5% real interest rate, however, the point is reached where the annual interest earned on the accumulation of taxes plus prior interest income exceeds the annual benefit payments, so that the principal is never depleted--in fact, it plus interest grows indefinitely. (105)
I do not mean, however, to quibble with the interest-rate or other demographic assumptions made in these studies or even to quibble with their results. Rather, what I challenge is their implicit message that it is appropriate to view the Social Security system as nothing more than a government-sponsored pension plan when analyzing the distribution of "tax" burdens. If Social Security "taxes" are viewed as nothing more than the equivalent of government-mandated pension plan contributions, which will generate an individual return personal to the taxpayer, then they are arguably not "taxes" at all (and thus not a "double" tax on labor income).
One of the most vociferous opponents of the analogy of Social Security taxes to pension plan contributions is Patricia Dilley. (106) She views the analogy as nothing more than misleading rhetoric, (107) no matter how common and widespread the impression.
Payroll taxes are merely a method of financing the system, not the basis for benefits earned and paid out. Benefit calculations are made based on earnings recorded in the Social Security system .... [B]enefit calculations do not take into account the amount of taxes paid, and benefits cannot be reduced in the event of a failure to pay such taxes by the employer who is responsible for withholding [Social Security] taxes from workers' paychecks. The [benefit] system could as easily be financed through income tax revenues, like other government expenditures, without any impact on the earnings-based benefit structure. (108)
In short, Professor Dilley views the payment of Social Security taxes as unrelated to the receipt of future benefits. Rather, the retiree's economic right to a claim on the country's resources to support consumption in retirement is attributable to the claimant's prior demonstration of "worthiness" through his attachment to the workforce for the requisite number of quarters. It is the "lifetime of work," (109) not the payment of Social Security taxes, that raises the Social Security entitlement. This is the antithesis to both the retirement annuity model and the relief-of-poverty model, which is based on need rather than worthiness.
The public retirement entitlement is a public obligation designed to protect the public interest in social stability and orderly labor force exit by the elderly. The public entitlement is backed by the public taxing power and meets the public need for assurance of old age income security for all workers through redistribution of tax revenues. The notion of public advance "funding," and indeed the emphasis of the original designers of Social Security on payroll tax financing as the equivalent of private pension contributions, is an example of a useful analogy taking over the analysis and distorting the comparison beyond meaningful limits. (110)
Important design features of the system also highlight this disconnection between taxes and benefits. (111) For example, married workers who are paid less than their spouses will receive benefits based on their spouses' higher earnings. Thus, they receive no "benefit" for Social Security taxes paid by themselves and their employers. This is also true for individuals who work fewer than ten years.
Moreover, a portion of the Social Security tax base goes toward paying dependent benefits. Nevertheless, workers must bear the full payroll tax even if they have no dependents. In addition, only the thirty-five highest years of earnings are counted toward computing Social Security benefits. Thus, "a person who works for 15 years at $30,000 gets as much in benefits as someone who works for 30 years at $15,000; a person who works 50 years at $10,000 gets much less than someone who works 25 years at $20,000 and so forth.. " (112) Finally, the disconnection between payroll tax payments and benefits received, on an individual basis, is particularly evident in the case of Medicare, since there is no correlation between the amount of taxes paid and the amount of Medicare benefits that one can receive.
Probably the most fundamental disconnection between taxes and benefits, however, is that Social Security taxes paid today by Taxpayer X are not linked to Taxpayer X's future benefits (as would be an annuity contribution by Taxpayer X). Instead, these taxes fund payments to current retirees under our pay-as-you-go system. (113) Indeed, because annual Social Security tax receipts currently exceed by a substantial margin the amount currently paid in benefits each year, the surplus receipts have been routinely spent to support general federal government activities and programs.
Because the presently retired generation will receive more in aggregate benefits than they paid in aggregate taxes (even with an interest-like return factored in), the system is effectively redistributive between generations (unlike a private annuity system).
Tax rates, in particular, were relatively low for those who are currently retired or retired in the past, but have risen considerably for those who are relatively young today. Since the formula for determining benefits in Social Security gives no credit for paying at a higher rate of tax, individuals gain nothing out of paying a higher rate. One result has been a large redistribution among generations, with more going to those around when the system was younger and rates were lower. Some parts of this redistribution were intended: in general, the goal was to help the old through the contributions of the young, especially when poverty rates among the old were high. (114)
Moreover, unlike a private annuity, the "return" (benefits) on "principal" (essentially, average lifetime wages) is deliberately calibrated to be redistributive within a single generational cohort as well. That is to say, a greater percentage of low-income workers' earnings is replaced under the Social Security formula than is replaced for high-income workers.
The [Social Security benefit] formula divides earnings into three brackets. As in the income tax system, each bracket has a percentage rate associated with it. The first dollars of earnings are replaced at the highest percentage rate, the next level of bracketed earnings at a lower rate, and the highest earnings at the lowest rate. Workers with the very lowest levels of earnings have all their earnings contained within the first bracket and consequently replaced at the highest percentage rate. (115)
Under current law, those three percentage replacement rates are 90%, 32%, and 15%. (116) A worker with low earnings, in other words, may see 90% of those earnings replaced. A worker with somewhat higher earnings will see the first chunk replaced at a 90% rate but the next higher chunk replaced at only a 32% rate, and so on. Adding to the redistributive nature of the benefit formula is the fact that earnings of a worker above the taxable wage base (currently $84,900) are ignored in calculating the benefit to be received. (117)
All of these system-design elements, which are inconsistent with the private-pension analogy, point more generally to the public purposes underlying the Social Security system articulated by Professor Dilley. The taxes paid can be conceptualized as supporting society-wide goals and benefits rather than merely individualized cash benefits. More specifically, Social Security can be conceptualized as supporting society-wide goals and benefits that happen to require cash payments and the provision of health care during retirement. These goals and benefits are rooted in nurturing a stable economic environment through subsidizing consumption expenditures by the retired and by encouraging retirement itself, thus permitting progress in the workplace by succeeding age cohorts. (118) As Wilbur Cohen phrased it, Social Security was a "built-in stabilizer of consumer buying power, permitting the continued functioning of the market-price-profit system in a work-oriented free enterprise economy." (119) President Roosevelt, when signing the bill, also referred to this aspect of the new program.
It is a structure intended to lessen the force of possible future depressions. It will act as a protection to future Administrations against the necessity of going deeply into debt to furnish relief to the needy. The law will flatten out the peaks and valleys of deflation and of inflation. It is, in short, a law that will take care of human needs and at the same time provide the
Commissions appointed in the early years to study and make recommendations with respect to the Social Security system echoed this theme when they recommended using general tax revenues to help fund Social Security. They did so because of the general, more widespread societal benefits, including a more stable economic infrastructure, achieved through the system. For example, the 1937-1938 Advisory Council on Social Security Final Report stated:
Since the nation as a whole, independent of the beneficiaries of the system, will derive a benefit from the old-age security program, it is appropriate that there be Federal financial participation in the old-age insurance system by means of revenues derived from sources other than pay-roll taxes. ....
Governmental participation in financing of a social insurance program has long been accepted as sound public policy in other countries. Definite limits exist in the proper use of pay-roll taxes. An analysis of the incidence of such taxes leads to the conviction that they should be supplemented by the general tax program. The prevention of dependency is a community gain in more than social terms. (121)
The Advisory Council on Social Security, Old-Age and Survivors Insurance in 1948 similarly reported to the Senate Finance Committee as follows:
The Council believes that the Federal Government should participate in financing the old-age and survivors insurance system. A Government contribution would be a recognition of the interest of the Nation as a whole in the welfare of the aged and of widows and children. Such a contribution is particularly appropriate, in view of the relief to the general taxpayer which results from the substitution of social insurance for part of public assistance.
... In our opinion, the cost of financing the accrued liability should not be met solely from the pay-roll contributions of employers and employees. We believe that this burden would more properly be borne, at least in part, by the general revenues of the Government. (122)
And, writing in 1946, economist Eliot J. Swan wrote:
It would probably not be desirable to abandon the contributory principle entirely, but in a comprehensive system, benefits could be met in large part from general revenues. The wider the insurance coverage and the more general the understanding and acceptance of social insurance as a necessary public responsibility that, like public education, conveys indirect benefits to all members of the community, the more appropriate it becomes to draw upon general revenues. The right of individuals to benefits and the guarantee that future obligations will be met do not rest on the fact that claimants have a previous contribution record nor on reserves built up from such contributions, but on the harmony of social insurance with the economic and social desires of the nation. (123)
In short, the repeated recommendations that the government use general revenues to supplement payroll tax revenues are premised on the broader societal goals and purposes sought to be accomplished through Social Security. Thus, the Social Security tax can be viewed as an undifferentiated federal tax that supports widespread societal goals, just as the presence of a well-developed judicial system supports our economy and benefits all of us, not simply those who actually appear in court.
The temptation to link Social Security taxes paid by a particular worker to future benefits to be received by that particular worker is understandable. After all, the benefits (unlike most government benefits) are defined in cash and can be calculated, if imperfectly, on an individual basis. Nevertheless, the attempt fundamentally mischaracterizes the system for the preceding reasons. Taxes simply are not investments. Moreover, we do not commonly engage in the same inquiry with respect to the "income" tax paid. That is to say, we do not perceive the income tax burden nominally shouldered by an individual to be reduced by the value of benefits purchased with those taxes, such as a functioning court system, national defense, regulated capitalism, etc. Indeed, if we did so, those in the tax brackets that are nominally the highest might be seen as subject to much lower rates of taxation, since the wealthiest in society arguably benefit most from the expenditures necessary to maintain our regulated capitalist system. The illogical conclusion of such an exercise is that the only real "tax" paid by the population as a whole is the amount of revenue collected that i s wasted instead of spent to provide benefits to the population.
Return to the proposal briefly discussed earlier regarding the repeal of the Social Security tax wage ceiling--and the concomitant slashing of the Social Security tax marginal rates--as an alternative to explicitly integrating the tax burden of the two taxes on labor income. Significantly lower marginal rates under the Social Security tax, closer to historical standards, could deal with the equity problem while not creating a huge budget shortfall. This would be true, however, only if the progressive payment formula, under which wages above the $84,900 wage ceiling are not factored into the replacement formula, remained intact. What about the argument that repealing the ceiling on the tax side while maintaining it on the benefit side is unfair?
That argument is, once again, premised on viewing the Social Security tax paid by a particular individual as "purchasing" his or her future correlative retirement benefit. Once the Social Security tax is seen as a true tax that helps to support the infrastructure of our capitalist system by maintaining consumption spending in the retired, decreasing the severity of the hills and valleys of economic growth and contraction, etc., then that criticism is weakened. If the tax is separated from the benefit system, there is little reason to see why it should not also be progressive through broadening the tax base (which would allow the lowering of rates), just as the income tax is progressive.
But suppose that the reader is not convinced and rejects my discontent with linking payroll taxes with the future benefits to be received on an individual basis. Such a rejection does not, in fact, necessarily mean that the payroll tax burden on labor income and the income tax burden on labor income ought not to be integrated, though the equity arguments for doing so might be lessened. The reader who accepts the personal and individual link between the old-age and survivors benefit received and Social Security taxes paid explicitly conceptualizes Social Security taxes as forced individual savings, like a pension plan. Perhaps such forced savings ought to be deductible under the income tax (a form of integration) under the analogy to those pension plan contributions that are tax-favored under our 124 hybrid income/consumption tax. (124) The mandatory nature of the Social Security system, however, weakens any analogy to the tax-preferred retirement savings regimes, which seek to provide an incentive for increas ing voluntary retirement savings behavior by providing (more favorable) consumption tax treatment to such savings than would otherwise occur under a pure income tax. The more convincing conceptual approach involves how integration analysis might proceed if the link between the payroll taxes and benefits received is rejected. (125)
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