TAXES AND LIBERTARIANS

TAXES AND LIBERTARIANS (Note on Social Security)

Libertarian Party presidential candidate (1996) Harry Browne is famous for the mantra, "end the income tax and replace it with nothing." Use the money you save on taxes to benefit your own children, or, better, your own charity, religious or community activity.

So let's get real. That's not going to happen right away (Browne's call for "cold turkey" notwithstanding). There are other proposals seriously floated by Republicans that could appeal to libertarians.

The most impressive is Steve Forbes's flat tax. The best arrangement would allow flat exemptions for dependents (regardless of marital status) and for certain savings (for example, saving in an impounded account in live of social security taxes, or for medical savings accounts). All other "deductions" would be eliminated, especially mortgage interest deduction. One problem is determining a fair definition even of "gross income." If a person moves to take another job or spends money out of his own pocket for job training or professional certification, shouldn't that expense be taken out of "gross income"?

Another proposal (Lugar) is a national sales tax, which many will see as regressive and which might lead to the VAT nightmare well known in Europe.

During the early days of the new Bush administration, there is a lot of debate over the inheritance tax. Even an exclusion of over $1 million (as scheduled) does not prevent heirs from having to sell businesses or family farms that are not liquid. Of course, many people reject the “great American Dream” that a major goal is to leave one’s children better off than oneself. Instead, each person is an endpoint, so (some liberal theory goes) family wealth should be broken up to level the playing field. It gets down to ideology.

But we need to sit back and contemplate a more subtle problem, which is the tendency for government to use tax policy and public facilities to encourage or discourage behaviors according to collective judgments. Of obvious controversy is the relationship between tax or entitlement policy and marriage, as well as welfare. More difficult to assess is sublte public approbation for "private" institutions which have employment or membership policies many consider discriminatory. Also controversial is the use of public facilities by special interests.

For example, churches and church-affiliated universities may excluded "non-believers," and the Boy Scouts rabidly exclude homosexuals. The BSA sees this as a speech and free association issue: it has a right to propogate its own view of "manhood" for others to consider or disregard with their own free wills. But many church-affiliated schools have state charters and enjoy tax breaks. The BSA has a 1916 congressional charter and has a track record of use of local public facilities and receiving local public grants. It is not surprising that a large organization with a national representation for "properly" socializing teenage boys in intimate circumstances would find the presence of gays disturbing, for the same reasons as does the military.

The mere use of a state charter, occasional use of public facilities (such as parade permits), and enjoyment of non-profit or religious tax breaks does not generally, in the eye of current law, make a non-commercial organization a "public accommodation" (a recent appeals court decision in New Jersey against the Boy Scouts notwithstanding). Nevertheless, the inference is disturbing. Tax-abated organizations enjoy definite legal advantages over individuals and commercial enterprises in advancing their views. This is an artifact of the idea of using a tax system to promote "community" centered activity. This makes the distinction between private voluntary association and public subsidy tenuous indeed. We need to think about this.

No wonder Harry Browne wants to get rid of all taxes.

Even so, I remember what my father used to say about publicly-owned facilities. They belong to "you and me."

SOME NOTES ON SOCIAL SECURITY:

Who is right? Is Social Security a Ponzi scheme that will fall apart in a few decades and inevitably leave some “taxpayers” holding the bag, like late entries into a soap-selling pyramid (with no partial volume refunds)? Or is it a valuable program to provide a safety net for the aged and can always be kept actuarially sound.

Well, there may be some fuzzy math here, because both sides are right on gradual Social Security privatization, depending on the postulates used. With “zero base” accounting Social Security would be self-paying, but the fundamental problem is that it always is behind the 8-ball, having offered benefits in the New Deal beginning to persons who did not contribute. Even this was all right until during the individualism of the 80’s and 90’s people started having fewer children, that is fewer wage earners from whom to transfer wealth to the aged.

If you take out a portion of the social security “tax” an replace it, for younger workers, with a mandatory savings contribution which the worker can, to some extent, control, then the worker will be responsible for his own return on that money (and some workers will be unwise or unlucky and squander it), and cannot be “cheated.” But, at the same time, this means that less money will remain available to keep the trust fund solvent. This is simple mathematics (one term for it is “cherry picking”), so on that score, Al Gore (rather than George W. Bush) is right.

The Cato Institute, however, points out that Gore’s argument is (even if textually correct) deceptive because the Social Security Trust Fund actuarial computations are based on the notion of “attributed interest” that amounts to phony money. See Common Cents, Common Dreams: A Layman’s Guide to Social Security Privatization, by Peter J. Ferrara and Michael D. Tanner, published in 1999 by the Cato Institute.

So, some of this comes down to a problem of ideology. Back in the early 1970’s, I remember being charged an “Old Age” sales tax in a Massachusetts restaurant while on the road. It use to be that Social Security really was regarded as a “tax.” As a tax. Social Security was and is regressive (because it maxes out slightly above median incomes). In fact, at one time federal workers did not have to pay it, as they had their own retirement plan (I cashed out on mine when I left the government in 1972 and bought a car.) Similarly, the Medicare tax could be seen as regressive. So the idea of keeping this kind of tax hardly makes sense even to liberal, left-leaning ideology. In fact, socialists would want to replace the Social Security tax with an incorporation into a much more progressive income tax. To some extent, this is what happens in Europe. I am told that in Britain, young professionals tend to pay about the same amount of “income tax” as in the U.S. because they do not pay a separate FICA or Medicare tax, but rather pay a progressive and bundled income tax.

The “ideology” point is suggested by a recent article by Paul Nadler, “Community Banking Comment: Worries About Social Security Are Misguieded,” in American Banker, 2/27/2001 (published by Thomson Financial). Nadler argues that social security is a defined benefit plan, not a defined contribution plan, so ultimately it is funded by taxes (which for 80% of the population exceed the normal federal income tax, when employer contributions are added). Still, the “good faith” of the government’s accounting may be questioned.

But, I think that gradually turning over responsibility for retirement and financial planning to younger workers, even for a mainstream Democrat (not a libertarian) makes some public policy sense. Even George W. now wants to boil things down to “personal responsibility,” like in the Intro to DADT. And it may be the expectation of greater personal control of Social Security lured younger professionals to vote for George W.; most want nothing of a religious right agenda. Still, the volatility (the “bottom fishing” or “capitulation” or short-selling problems) will pose problems for older workers who may need 401K money soon (especially as many companies have cut back defined benefit pension plans, have made associates more “responsible” for their own retirement and encouraged associates to share in the share-price ownership risks of their employers). The demographic changes—many people having fewer children to be available to provide economic and custodial security—have motivated many insurance and financial services companies to market lifelong financial planning and annuities to younger workers as and individualistic answer to both the social security and “family values” problems.

Return to hppub home page