Tax-Holiday Tricks Only Undermine Social Contract: Amity Shlaes

Dec. 8 (Bloomberg) — Black Friday, and we were getting ready to hop in the car and head to the outlet mall when the phone rang. It was a pollster calling to interview us about the nation's collective splurge. If we answered just three questions about the unpleasant topic of our politicians and the federal debt, we'd get a free Caribbean cruise.


That polling company was patting itself on the back. Its experts had figured out a way to get us not to hang up on the interviewer for ruining the mood of Black Friday with debt talk. Its bargain sounded fine, and visions of gifts to college-age sons and daughters danced in our heads.

Until the woman on the phone conveyed the details. The trip was short. You had to pay your own way to the pier in Florida. Plus, there were plenty of extras we'd have to cover, including, of course, any gambling — all of which we could pay for with credit. We got it. A trick.

Two thoughts occurred to us as we went to the car: The reward for willingness to talk about the country's debt was an opportunity to make family debt even greater, and we probably didn't want to talk to this company again.

A Poor Bargain

The same kind of poor bargain forms the basis of the plan to extend the payroll-tax holiday under discussion in Washington this month. In the name of making Americans feel less bad about their situation now, lawmakers are proposing something that sounds good, but will actually make our financial future worse.

Start with the basics. Social Security has never been sold to Americans as a true tax or an entitlement. From 1935 on, it has always been depicted as insurance with its own account — not as part of the general budget. When President Franklin Roosevelt first signed Social Security into law, he used the verb "to insure" on purpose. The law that regulates payments isn't called "entitlement funding" or "welfare"; it's called the Federal Insurance Contributions Act.

Of course, the government has often taken the cash from Social Security and left IOUs, and the program is confronting looming demographic challenges. But Social Security also resembles a bank: It doesn't have all the money it owes, but it has always paid out in the past. Besides, it has a civic benefit. Paying money in, and then getting it back later, has taught Americans good things about savings and trust in government.

That virtuous cycle could continue. Social Security requires only a few reforms to stay solvent: raising the age at which pensions start, slowing the growth in benefit levels, and — crucially — ensuring that everyone pays the full amount due, every year.

But those payments haven't been happening lately. In the name of economic emergency, lawmakers reduced Social Security payments in 2011. That sent some people to the outlet mall, if not on cruises. It also will almost certainly worsen Social Security's budgetary future.

The tax holiday is set to expire Jan. 1. Senate Majority Leader Harry Reid and others are seeking to extend it for another year. To pay for this, Democrats were planning to rely on a surtax of something like 1.9 percent a year on income of more than $1 million, which Reid said is "a tiny, tiny surtax."

The justification here is that some economists believe that getting cash into middle-class hands is best for growth. That's a dubious proposition: Even the "tiny, tiny surtax" will add to the burden on the wealthy, which is already growing because of coming increases in state income-tax rates. Tax them enough — and we're at that point — and the rich won't create jobs for the workers after the payroll-tax holiday ends. The arrangement becomes another trick, like a cruise with too many charges.

Troubling Civics Lesson

The more troubling feature of this proposal, though, involves civics: You're telling someone to forget about a bad problem because that problem is someone else's responsibility. In other words, Social Security really isn't insurance, it's just an entitlement. Shifting around the budget numbers to make it look as though the Social Security trust fund won't be touched is simply part of the trick.

Republicans are also treating Social Security like an entitlement. Their plan this week is to agree to a payroll-tax holiday in exchange for a measure that could speed the development of the Keystone XL oil pipeline. Keystone XL is an important project and would help deliver economic growth. But again, such a deal suggests that structural shortfalls can be ignored if they're fixed on paper. And that the federal government will always be there to bail out programs challenged by deficits.

Which program do Republicans suggest will pay for the payroll-tax holiday of 2014?

History is in vogue these days — President Barack Obama just evoked Theodore Roosevelt and his "Square Deal" with America in a speech Dec. 6 in Kansas. The use of the word "deal" is telling: Obama wants to strengthen government's contract with the people, just as Newt Gingrich, in the 1990s, sought a "Contract with America." Payroll-tax holidays do the opposite: They erode the contract.

Each time lawmakers negotiate a cynical fiscal deal full of pretend holidays, they make the next deal — square or round — harder to seal. The best way to get public support for future reforms is to surprise everyone by honoring at least one of the old deals. Otherwise, it won't be a pretty place we land in when we return from that cruise.

(Amity Shlaes is a Bloomberg View columnist and the director of the Four Percent Growth Project at the Bush Institute. The opinions expressed are her own.)

© Copyright 2011 Bloomberg

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