The Obama Tax Deal: Giving the Hostage Takers More Hostages
By Dean Baker
AS READERS OF THIS blog know, I was originally willing to support the
package that President Obama negotiated with the Republicans. While I am
not happy about giving tax breaks to rich people, President Obama
extracted more concessions from the Republicans than I had expected in
the form of extending unemployment insurance benefits, an expanded
earned income tax credit, and most importantly a substantial reduction
in the payroll tax.
However, after further thought and conversations with people around
Washington (first and foremost, Nancy Altman, the co-director of Social
Security Works), I have become convinced that this deal would be a
disaster. Paul Krugman does a nice job laying out the limited benefits
of the stimulus, but my greater concern is what happens to Social
Security in this story. Effectively, this deal would give us a permanent
two-percentage point reduction in the payroll tax in a Washington
climate very hostile to Social Security.
The logic is that the tax cut is scheduled to expire in December of next
year. While it would require new legislation to extend the cuts, the
Republicans will describe the failure to extend the cuts as a tax
increase on middle class workers. (Several Republicans have already told
reporters that this would be their view.)
Democratic officeholders have had difficulty standing behind tax
increases for the very richest people in the country. It is difficult to
imagine them sticking their necks out for tax increases that will hit
low and middle-income workers, especially in a context where
unemployment is virtually certain to be above 8.0 percent and quite
likely above 9.0 percent. This means that the reduction in Social
Security taxes may not be for just one year, it may persist for the
In principle there is nothing wrong with financing a portion of Social
Security benefits with money from general revenue. This was in fact the
original intention of President Roosevelt when he designed the program.
However, the fact is that the program has always been financed
exclusively by the Social Security tax that is taken from workers'
wages. This makes the tax regressive, but it has the advantage that
workers can quite legitimately say that they have paid for their
benefits. This will be to some extent less true if a portion of the
funding comes from general revenue rather than payroll taxes. In short,
getting funding from general revenue opens a new line of attack on the
The prospect of this tax cut being the basis for a renewed attack on
Social Security could be dismissed if the program had defenders in high
places, but this does not appear to be the case. Most of the Republicans
would almost certainly like to privatize Social Security.
Unfortunately, the Obama administration cannot be counted on to defend
the program either. In fact, top officials in the administration seem to
view attacks on Social Security and its supporters as a way to prove
their manhood. President Obama's decision to appoint two arch-enemies of
Social Security to chair his Fiscal Responsibility commission certainly
does not inspire confidence among supporters of Social Security.
In short, supporters of Social Security have good reason to oppose the
tax deal. It is easy to have the same stimulus with an expanded version
of President Obama's Making Work Pay tax cut. Supporters of Social
Security should reject the latest deal and tell President Obama to stand
behind his own tax cut. This is what presidents are supposed to do.