The idea behind most magic tricks is to distract the audience — with patter, superfluous hand motions, and other tricks — so that they won’t notice the magician making his key move, such as palming the card, or sneaking the coin into his vest pocket. If you know the trick, it’s usually possible to ignore the distractions and spot the move.
Columnists sometimes do the same thing. In the midst of a lot of hand-waving and harrumphing, they sneak in a key assumption — and before you know it, it is transformed into a fact. And then — presto-change-o! — the assumption, now a fact, becomes the key fact underlying the whole piece. And, because it was snuck in, this central proposition is never held up to the light of scrutiny.
Let’s see if you can spot the trickery employed in Michael Hiltzik’s latest column. I’ll give you a hint or two by bolding some of the language:
Despite what Social Security’s enemies love to claim, the trust fund is not a myth, it’s not mere paper. It’s real money, and it represents the savings of every worker paying into the system today. So I’m going to train a microscope on it.
What trips up many people about the trust fund is the notion that redeeming the bonds in the fund to produce cash for Social Security is the equivalent of “the government” paying money to “the government.” Superficially, this resembles transferring a dollar from your brown pants to your gray pants — you’re no more or less flush than you were before changing pants.
But that assumes every one of us contributes equally to “the government,” and by equal methods — you, me and the chairman of Goldman Sachs.
The truth is that there are two separate tax programs at work here — the payroll tax and the income tax — and they affect Americans in different ways. The first pays for Social Security and the second for the rest of the federal budget.
Most Americans pay more payroll tax than income tax. Not until you pull in $200,000 or more, which puts you among roughly the top 5% of income-earners, are you likely to pay more in income tax than payroll tax. One reason is that the income taxed for Social Security is capped — this year, at $106,800. (My payroll and income tax figures come from the Brookings Institution, and the income distribution statistics come from the U.S. Census Bureau.)
Since 1983, the money from all payroll taxpayers has been building up the Social Security surplus, swelling the trust fund. What’s happened to the money? It’s been borrowed by the federal government and spent on federal programs — housing, stimulus, war and a big income tax cut for the richest Americans, enacted under President George W. Bush in 2001.
In other words, money from the taxpayers at the lower end of the income scale has been spent to help out those at the higher end. That transfer — that loan, to characterize it accurately — is represented by the Treasury bonds held by the trust fund.
The interest on those bonds, and the eventual redemption of the principal, should have to be paid for by income taxpayers, who reaped the direct benefits from borrowing the money.
So all the whining you hear about how redeeming the trust fund will require a tax hike we can’t afford is simply the sound of wealthy taxpayers trying to skip out on a bill about to come due. The next time someone tells you the trust fund is full of worthless IOUs, try to guess what tax bracket he’s in.
Did you see what he did?
If you weren’t paying close attention, this could almost make sense. Boiling down his argument: there’s a payroll tax and an income tax. The income taxpayers (the rich) are accomplishing their goals by borrowing from the fund established by the payroll taxpayers (the poor). Now, the rich have to pay back the poor, and the damned cheapskates are whining about it. The nerve!
Where Hiltzik palms the card is where he assumes that the programs paid for in this manner are programs “to help out those at the higher end.” Let’s go over what Hiltzik says these programs are: “housing, stimulus, war and a big income tax cut for the richest Americans, enacted under President George W. Bush in 2001.”
Take those programs in order. “Housing” is a federal program designed “to help out those at the higher end”? On what planet? The stimulus is a program designed “to help out those at the higher end”?? That is a ridiculous notion, and becomes even more ridiculous when you look at a breakdown of how stimulus funds are spent.
As for war, you can agree or disagree on the need for the wars we are engaged in, but unless you believe that we have conducted wars in Afghanistan and Iraq for oil (and if we did, where is our damn oil?), those wars are conducted for the common good of the security of the entire country.
As for the notion that the tax cuts are a program designed to benefit the rich . . . let’s take a step back to put that contention in perspective.
What Hiltzik ignores is that the federal government is essentially a huge redistributor of wealth from the rich to the poor. When the rich pay income taxes, they don’t do it to benefit themselves, as Hiltzik implies. They do largely to benefit the poor.
Let’s take a quick refresher course in where our federal tax dollars go. Over half the budget is spent on entitlements. Even if you cut Social Security (20% of the federal budget) out of the equation, as an outlay that (per Hiltzik) is supposed to be funded by payroll taxes, that still leaves 34% of the budget that goes to Medicare, Medicaid, CHIP, and other safety net programs. Some of these programs are funded, not by payroll taxes, but by income taxes — and they are hardly programs that “help out those at the higher end.” Another 6% of our budget goes to interest on the debt, so that we can continue to spend money on entitlements like there’s no tomorrow. I have just described 60% of our budget outlay.
About another 20% goes to the defense budget — which, again, is money spent for the common good. The remaining 20% of the budget is spent on things like benefits for federal retirees and veterans, scientific and medical research, transportation infrastructure, education, international spending, and other miscellaneous costs. Hardly any of this goes to benefit the wealthy at the expense of the poor.
Meanwhile, who pays for all this? These figures should be familiar to you, but just as a refresher: as of 2007, the top 1% of earners paid 40% of the federal income taxes. The top 5% of earners paid 60% of the federal income taxes. And the top 50% of earners paid a shocking 97% of federal income taxes. These figures remain fairly constant through the years.
So when Hiltzik speaks of the Bush tax cuts as a “program” designed “to help out those at the higher end.” what he is really saying is that those tax cuts very marginally reduce the amount by which the rich are soaked to benefit the poor. (Remember: our money is ours. When the federal government reduces taxes, it is not giving us money, it is allowing us to keep more of our own money.) And if the government allows a marginal reduction in the amount that it soaks the rich to pay the poor, and funds that marginal reduction by raiding the trust fund, which is paid for by payroll taxpayers, we are then essentially borrowing from the poor to pay the poor.
For Hiltzik to bleat that the rich have a lot of nerve to complain about the tax increase necessary to fund the shortfall in the trust fund, Hiltzik has to pretend that the programs paid for by income taxpayers are largely programs to benefit income taxpayers. In fact, as I have shown, a huge slice of the money for those programs goes to benefit the bottom half of earners, who pay virtually no income tax at all. (Again, in deference to Hiltzik’s analysis, we are removing payroll taxes and Social Security from the equation.)
So all the whining you hear from Hiltzik about “wealthy taxpayers trying to skip out on a bill about to come due” ignores the fact that their bill is largely to pay for programs that benefit other people.
Essentially, Hiltzik makes billions of dollars of debt disappear — and tries to convince you that they never existed to begin with. Abracadabra!
The next time Hiltzik tries to engage in sleight of hand like this, tell him you know the trick.
Thanks to Bradley J. Fikes.
UPDATE: Payroll taxes also fund Medicare, which is also funded by other sources including income taxes paid on Social Security benefits. I accordingly added the words “some of” to the sentence: “Some of these programs are funded, not be payroll taxes, but by income taxes — and they are hardly programs that ‘help out those at the higher end.'” I actually had noticed this discrepancy before hitting publish, but somehow forgot to make the correction. Thanks to Foo Bar. The post’s argument remains sound.