Sunday, April 06, 2008

NYU Tax Policy Colloquium on "Making Social Security Work"

Last Thursday at the colloquium, Jonathan Barry Forman of U Oklahoma Law School presented (or, given our format, responded concerning) "Making Social Security Work," a chapter from his recent Urban Institute Press book, "Making America Work."

The chapter describes the Social Security fiscal crisis - which some people call large, others small, even when they agree about its actual size (a bit like arguing about whether a spill on the floor is big or small - what the heck, either way at some point we'll have to wipe it up). It offers this as motivation for fixing the system to have a level-one demogrant for seniors plus a level-two individual account, in lieu of the current benefit structure.

As Mihir Desai noted in the discussion, one could fix the Social Security fiscal gap without fundamentally changing the structure. (A bit later retirement, a bit higher payroll tax rate or ceiling, a bit slower benefit growth relative to wage levels, etc.) Or, one could change the fundamental structure, if one likes a different one better, even in the absence of any long-term fiscal problem.

More quibbling: In terms of the book's idea of rewarding, or at least not overly penalizing, work, penalizing it is basically what the fiscal system does in light of its basic distributional aim of treating Bill Gates as better-off as the readers of this blog, and them in turn as generally better off than homeless individuals. A consumption tax burdens work, as does an income tax or any other plausible base. Sure, there are some silly Social Security features that needlessly discourage work, such as the treatment of earnings by people age 62 to 66 if they have selected early retirement, or arguably the lack of a clearer tax-benefit link in the system (so that the marginal burden it imposes on work arguably seems higher than it actually is). Fundamentally, however, discouraging work up to a point is the name of the game. Why select it as a key consideration here?

Somehow, the conversation ended up devolving into the good old income tax versus consumption tax chestnut that has occupied us so often in past years' sessions (though for this year, it was a first). Forman argued that using general revenues (and thus the income tax) is more efficient than payroll tax financing because it covers a larger percentage of GDP. But, insofar as that reflects the difference between an income and a consumption tax base, one must keep in mind the tax policy and economics literature's recent finding that an income tax is likely to be less efficient because its burdening savings on top of work does not mean that it burdens work any less. Just because GDP happens to be an income measure doesn't mean we should think about efficiency in terms of the percentage of GDP covered. It's true that the income tax also reaches wages in the economist's sense that are not legally wages for payroll tax purposes. But then again it is also true that the existing income tax base has more preferences built into it than the payroll tax base (they share the preferences for fringe benefits and such, but the income tax has lots more such as home mortgage interest et al). So anyway, why should we think that income tax financing would be better? (Rate structure is a separate point.)

Anyway, just speaking for myself, I didn't think I came out of the day knowing all that much more than I had going in. But it was a lively and interesting session.

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