The bigger baby tax

You can't call the budget deficit a "baby tax" and oppose Social Security overhaul at the same time. If you do, your words cannot be taken seriously.

Yet that is the position of a lot of people, including most Democrats in Congress. One of their mantras is that the budget deficit represents a burden on future generations. If we don't take care of it now (by raising taxes), they repeatedly warn, then our children and grandchildren will pay for it later.

Call it the baby tax. In trying to better connect with voters, the Democratic leadership is considering the old standby of re-labeling things. They reportedly have heeded the advice of George Lakoff, a Berkeley professor of linguistics and cognitive sciences, who among other things recommends calling the Bush budget deficit a baby tax.

But this is strange, coming from Democrats. Money to pay down the budget deficit comes from income taxes. The rich pay most of the income taxes: the top 1 percent of earners pay about 33 percent of all income taxes, the top 10 percent pay around 65 percent, and the top 50 percent pay in the neighborhood of 95 percent. If higher taxes on present-day rich people do not bother Democrats, why should higher taxes on future rich people bother them?

In fact, in the name of combating income inequality, many if not most Democrats think higher taxes on the rich is a good thing. So in this sense, a Democrat might consider a budget deficit to be desirable, since it means higher taxes on the wealthy people of tomorrow.

Another strike against their budget-deficit credibility is that, while they purport to care about the future tax burden of our babies, they rarely seem to give a hoot about the tax burden of yesterday's babies: us. In addition to paying for the budget deficits of past years, today's workers - mainly higher-income ones - are paying for lots of government spending going on right now. Congressional Democrats (as well as Republicans) want to spend even more, thus adding to the burden.

And the biggest strike against their credibility is their position on Social Security. The program's unfunded liability is about $12 trillion; that's how much Social Security payroll taxes would have to rise over the long term in order to deliver on the program's promises. So that debt is much larger than the federal budget debt of $7.6 trillion.

Payroll taxes are different from income taxes. Unlike income taxes, which most low-income earners do not have to pay, a flat 15.3 percent payroll tax is imposed on all workers, even minimum-wage earners. Social Security accounts for 12.4 percentage points of that tax. In fact, since Social Security payroll taxes only apply to the first $90,000 of one's income, they consume a larger portion of someone who has a lower income job than they do a rich person's income.

Leaving the program unchanged means Social Security payroll taxes would have to rise substantially to cover that debt. Yet Democrats have no plans to reduce that baby tax. In fact, they actively oppose any plans to do so.

The way to reduce and eventually eliminate this tax is to restructure Social Security from a spending program to a savings program. Rather than immediately spend workers' payroll tax money as is currently done, the government should ensure that the money is socked away in individual retirement savings accounts, i.e. pre-funding. That way, workers would fund their own retirements rather than rely on higher baby taxes to do so.

(Democrats typically object to personal retirement accounts on the grounds that retirees or near-retirees could lose much of their money in a stock market downswing. But one of the cardinal rules of saving for retirement is to shift out of the stock market and into safe investments, such as money market funds or Treasury bonds, as you get closer to retirement. Under a system of private accounts, the government could also decide that everyone gets an annuity - a fixed sum of money at regular intervals -- upon retirement, preventing retirees from spending all of their savings during the remainder of their life.)

So here we have a situation where Democrats want to reduce the budget deficit and thereby reduce taxes on future rich people. Yet they vigorously oppose reducing the Social Security debt through pre-funding. The consequences of this lack of action would be higher taxes on those individuals with low incomes in the future.

To avoid this contradiction, they should drop the baby tax rhetoric. Or, if they are genuinely concerned about the future tax burden of our babies - rich ones, poor ones, and middle-class ones alike - then they should get behind Social Security reform now.

Then, once Social Security reform is underway, it will be time to go after the biggest baby tax of all: the unfunded liability of Medicare.