Rational Action

I had the pleasure of reading Donald Luskin today, and followed his link to a “remarkable” account of last week’s social security debate over at Perry Eidelbus’ Eidelblog. Then I came across this passage, and I got mad. Why? Read it first.

Krugman rambled incoherently for a minute, and I really didn’t understand what his point was. Then he said the payroll tax is “just another tax.” Aha! That brings us back to Krugman’s fallacial claim that there will be no Social Security “deficit.” There won’t be one, not once Krugman & Co. change the nature of the financing and lump Social Security in with general spending. It’s like saying 2 plus 2 equal five, once you’ve changed the rules of math. As I already said, isn’t Social Security supposed to be financed by a dedicated payroll tax? So if payroll taxes can’t pay all Social Security benefits, and we have to increase other taxes to make up the difference, what’s the difference, other than the economic incidence, between raising those taxes and raising the payroll tax? (Bolding mine)

I’m no blind follower of PK (Although I haven’t had the audacity to contradict him in this blog), but Mr. Eidelbus’ response completely misses Krugman’s point. That’s because Krugman wasn’t rambling incoherently: he was actually revealing a major problem in the way Michael Tanner had been discussing Social Security. Tanner wanted to say that there was no trust fund, but that there was still a looming Social Security crisis, and Krugman eloquently called him on it.

What Krugman actually said was that you could think of the government in two ways. In the first way, we have a set of taxes (payroll, income, capital gains, etc.). The money which these taxes reap from the citizenry flows into a giant pot, in which it gets mixed around until, as we peer into the pot, we can’t tell a payroll tax dollar from an income tax dollar from a capital gains tax dollar. When the government wants to fund a program, it scoops money out of the pot and plops it down on the program.

On the other hand, we could say that different taxes serve different purposes. The Income Tax could be linked to one part of government, and the Payroll Tax could be linked to another. This gives us a few separate pots, and while the government might be able to borrow between the pots, since each one has its own dedicated tasks, this borrowing is actually borrowing. It has to get paid back, or the pots aren’t really separate, and thus the taxes aren’t really dedicated.

Krugman wasn’t advocating that we should take one particular view or another. In fact, I think Eidelbus must have zoned out, because when Krugman said that the payroll tax was “just another tax,” he was simply describing the mindset one would need in order to believe in the first viewpoint. The problem was that Tanner wanted to take both viewpoints at once.

Say that the Payroll Tax is just another tax, undifferentiated in the end from the Income Tax; okay, we’ve just eliminated the Trust Fund. But then we’ve also eliminated the Social Security crisis! After all, what do we hear about the crisis? “Starting in the year 2018, Social Security outgo will exceed income…” What income? Payroll Tax income!

But what if the Payroll Tax is just another way to raise money, and Social Security is just another way to spend it? Then we don’t have a Social Security crisis at all. In fact, we’ve got something must worse: a Federal Government crisis. Put simply, the government pulls in far less money than it spends, regardless of whether Social Security and the Payroll Tax balance out. “Fixing the Social Security shortfall” is about as significant here as “fixing the Defense shortfall,” since these programs are both part of the same behemoth.

You could take the second viewpoint and say that we need to keep Social Security and the Payroll Tax balanced. Then the Payroll Tax is no longer “just another tax” — it’s a dedicated one, specifically for Social Security. Since this dedicated tax has pulled in more money than Social Security could spend over the past two decades, the tax has created substantial reserves. Now we have a trust fund — it begins to diminish in 2018, and it’s exhuasted between 2042 and 2052. We’ve also got a Social Security problem, but it doesn’t strike for around four decades — hardly a crisis.

(Yes, thinking about the government this way makes Social Security seem more solvent at the expense of the General Fund [the rest of government.] I’m okay with that, because the payroll tax’s regressivity makes using it to finance the General Fund very problematic. I wrote about this problem)

You can’t have it both ways: you can’t say that we have specifically a Social Security crisis, but also say that there is no Trust Fund. Tanner claimed that there was no trust fund because Social Security’s income had been taken by the rest of the government. He also said that Social Security’s income exceeded its outgo beginning in the year 2018, and that thus we desperately needed reform. Krugman called him on this inconsistency. Meanwhile, Eidelbus woke up in the middle of one of Krugman’s sentences and completely missed the point.

This entry was posted on Monday, March 21st, 2005 at 6:50 pm and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.