Wayne O’Leary

Passing the Buck on Deficits

The buck stops here” is a favorite saying attributed to President Harry S. Truman. What, then, would Truman have made of the avid buck passing going on in today’s Washington among our political elite? His reaction would likely have singed the wallpaper in the Oval Office.

The buck that’s being passed is the attempt to lay the groundwork for slashing federal entitlements as a solution to reducing the national budget deficit.

The deficit is the problem inside-the-Beltway types have decided is the existential threat of our time.

It’s not lack of jobs or global warming or the crumbling infrastructure or even terrorism; it’s (all together now) the deficit! Nothing else matters because those in charge say nothing else matters.

And how will we solve the deficit? We can’t raise taxes. That would be unthinkable. Even returning to the revenue rates in effect during the booming, full-employment years of the 1990s is deemed a nonstarter, although the world did not end between 1993 and 2001 because assessments increased slightly. Above all else, taxes cannot be raised on America’s rich, whose overall contributions have been trending downward for three decades. To their credit, prominent billionaires like Warren Buffett and the Bill Gateses, junior and senior, have offered, again and again, to pay more. They don’t understand; it’s against the national interest to tax them.

This wasn’t always the case. In earlier times, Americans paid for what they wanted from government, and the wealthy, who benefitted most from society, paid a commensurate share of the tab. No more. The turnaround came in 1980 with the election of Ronald Reagan, a watershed moment that set America’s fiscal tone for the next 30 years. Reagan cut federal taxes across the board, but mostly he cut them for the richest among us, principally the upper 1% — those with annual incomes ranging from $300,000 to infinity. These are the folks who, according to tax expert David Cay Johnston, claim close to a quarter of all reported income in the US and own nearly half of all stocks, bonds, and other financial assets.

The diminished tax obligation of this favored minority, endorsed over time by most of Reagan’s successors, has become virtually sacrosanct. Since 1980, the maximum capital-gains tax imposed on the sale of investment holdings (the source of half the income of the upper 1%), previously over 30%, has dropped to 15%, as has the levy on dividends; the estate or inheritance tax, America’s only wealth tax, formerly 77% for the largest bequests (and 55% as recently as 2000), has fallen to 35%; and the top marginal income-tax bracket, 70% when Reagan took office, has likewise shrunk to 35%, about where it was when Calvin Coolidge and Herbert Hoover roamed the White House.

The bogus rationale for this radical shift in the tax burden away from the monied class is that they also comprise the investor class, whose investments enable companies to expand and create jobs.

If this is the case, where, after 30 years of supply-side fiscal experimentation, are the jobs? In theory, there should have been quick, employment-rich recoveries from the last several recessions.

Americans should, given the robust stock market, be working in record numbers right now; they’re not, because the theory is shot full of holes. Tax cuts in uncertain times tend to be saved, not invested, and businesses hire based on consumer demand, not because investors buy stocks.

Nevertheless, Washington politicians love to cut upper-end taxes; they benefit personally, and, more importantly, so do their campaign contributors. And by now, the entire process has acquired institutional momentum.

There’s a fly in the ointment, however. Permanently low taxes for the affluent have to be somehow financed so as to avoid the appearance of unbalancing the budget to an unacceptable degree.

A 2008 analysis by the Washington Post estimated, for instance, that extending the expiring Bush tax cuts on income, capital-gains, and dividend taxes alone would swell the federal deficit by more than $1.3 trillion over 10 years.

How, to finesse the effect of such revenue losses has been an ongoing dilemma ever since the original Reagan tax cuts, and it’s here that Social Security and the other entitlements come into play.

Beginning with the 1983 revisions of Reagan’s National Commission on Social Security Reform (the Greenspan Commission), implemented in the wake of his huge tax reductions of two years earlier, Social Security has been used to disguise the budgetary impact of those tax cuts — and the ones that followed in subsequent years.

The Greenspan Commission was appointed in late 1981 to address the social-insurance system’s hypothetically imminent collapse, an exaggerated short-term budgetary shortfall easily soluble by a modest payroll-tax increase. But the commission went well beyond a simple fix, increasing FICA taxes to twice the level needed for immediate pay-as-you-go solvency and dedicating the surplus (supposedly) to a “trust fund” for future generations of retirees.

These extra payroll-tax infusions from average workers — the highest-paid are shielded from any liability above the program’s annual tax cap (now $106,800) — were presumably squirreled away in the equivalent to Al Gore’s celebrated “lockbox.” From the start, however, administrations from Reagan’s onward have used creative bookkeeping to transfer the surplus trust-fund monies to the government’s general operating budget in order to offset continued high-end income-tax cuts, help fund the government, and shrink the apparent size of the federal deficit. This “borrowing” (and replacement by Treasury bonds) carries an implicit promise to pay the money back when the time comes.

Today’s political leaders say Social Security will begin running out of funds by a certain date (currently projected as 2037), but what they actually mean is the program will face insolvency if the money improperly taken from its coffers is not replaced; truth be told, they would rather not replace it. The reason is simple: it will require compensating tax increases, especially on the very privileged, something presently considered beyond the pale.

The default position? Continue rolling previously financed entitlement spending into the general budget deficit, imply it’s all one and the same, and solemnly call for shared sacrifice. The buck is being passed, and America’s seniors and seniors-to-be figure to be smack on the receiving end.

Wayne O’Leary is a writer in Orono, Maine, specializing in political economy.

From The Progressive Populist, April 15, 2011