You Ask, I Answer

August 22nd, 2011 at 8:08 am

Q: It seems unlikely that we will be able to increase the payroll cap of Social Security taxes in the near future. But I’m curious to know why the suggestion is to “gradually” increase it rather than doing what is needed all at once.

Also, another suggestion that isn’t on your list is one of Dean Baker’s. He suggests that applying the “payroll” tax to all income rather than just salaries would close the Soc Sec funding gap. What is your opinion of this idea?

A: The only reason for the phase in is to offset any potential contractionary impacts in an economy that’s still weak.  We’re talking here about the upper strata of the middle-class here—upwards of $107K—and while such families are not struggling relative to the nation household median of around half that income, I’d still rather see a gradual phase in.

The other reason is politics—such phase-ins go down a little easier, though given the rabid anti-tax crowd, probably doesn’t make much of a dif.

Re Dean’s idea, I’d probably not go there.  It makes sense to me that the funding to the program is tied to earnings—the paychecks of today’s workforce benefits from the work and productivity of their forebears—so I’d keep that link.  I’d rather have more progressive income and capital taxation and use that revenue to amply fund general gov’t operations.

What concerns me more here is a) the fact that due to earnings inequality—large concentrations of earnings at the top of the scale—more income is escaping the salary cap, and b) an ever larger share of the paycheck is outside the taxable wage base (nontaxed benefits).  That’s why I found the Domenici/Rivlin idea of applying the payroll tax to employer-sponsored health care benefits (again, I’d advocate for a gradual phase in here too).

Q: Do your numbers on public employment in Texas include census workers?

A: Yes, but they were not in the data at the beginning and end points of the series, so they don’t affect the comparison (those were temporary jobs in 2009).

BTW, here’s a good article on the Texas Keynesian miracle from the WaPo yesterday.

Q: I thought the knock against reducing payroll tax was that it led to an undercapitalized Social Security system– and worsened long term projections (hence, playing into R memes about having to kill Social Security to save it)?

A: Any losses to the Soc Sec system from a payroll tax holiday must be made up through general revenue, which is precisely what’s been happening this year and would next year as well if we extend the policy, as we should.

Think of the payroll tax as nothing more than an efficient mechanism for delivering the tax break to workers’ paychecks.  It might be better to just have a tax credit directly from general revenue, but this is simpler and more direct.

Q: Do you know what the president is thinking regarding ‘mortgage relief’ through ‘executive action’ mentioned today in an article in the Washington Post? Also, what would you suggest for ways to provide mortgage relief?

A: I don’t have inside info on this but I did write about the idea to move the foreclosed properties owned by Fan and Fred into the rental, as opposed to the residential, market.

There’s another idea floating around to have Fan and Fred provide automatic refis to the holders of the 30 million mortgages they own or insure.  These would go to homeowners current on their mortgages, not the underwater folks, where refis are a trickier business.  The idea is to provide a stimulus through lower monthly payments that could amount to $60 billion/year, as the average interest rate would be reduced 1-2 points.

Who takes the haircuts here?  The investors who own the debt: some of it is on Fan/Fred’s book, but most is held by private investors.

I think this is an interesting idea for stimulus and a good way to hasten deleveraging of household balance sheets (i.e., lower the cost of household debt).  But if you believe that it’s the 25 or so million homeowners with distressed loans that are continuously holding the economy back, this won’t scratch that itch.

 

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4 comments in reply to "You Ask, I Answer"

  1. PeonInChief says:

    Since when are renters not part of the residential market? Are we just camping?


  2. Tyler says:

    What do you think about a federal income tax holiday targeted at middle-class families that are struggling the most, say those in the $40,000 to $90,000 range?


  3. Ken Houghton says:

    “Re Dean’s idea, I’d probably not go there. It makes sense to me that the funding to the program is tied to earnings—the paychecks of today’s workforce benefits from the work and productivity of their forebears—so I’d keep that link. I’d rather have more progressive income and capital taxation and use that revenue to amply fund general gov’t operations.”

    You’re conflate General Fund and OASDI revenues. Right now, OASDI is regressive. (Haven’t spent several years looking up around the end of Q3 or beginning of Q4 and realizing my paycheck was larger, I can vouch that the money was nice, but hardly necessary to keep us from c(0).)

    Also, I note that there was no “gradual” phase-in of the ending of the cap on Medicare/caid.


  4. Chris says:

    Not sure if this is the place to put this, but here it goes. (First, you have two articles that came across your feed, but aren’t on the page. This is a question about one of those articles – the safety net.)

    I’ve heard time and time again the argument that minimum wage increases unemployment is actually detrimental to the lower class. You recommended increasing it again. If you know the argument to which I’m speaking, would you mind explaining in a post why this is or isn’t the case and how raising the minimum wage would help?

    Again, this would help with the family BBQ problem. :)


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