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Income taxes are now bailing out Social Security



I'll wager that the vast majority of taxpayers are completely unaware (as I was until today) of the fact that the payroll tax cut "stimulus" that was enacted in December '10 and extended through this year was financed by income tax revenues. This represents an ominous milestone in the history of Social Security, since it marks the first time that the program has ceased to be a government-run annuity program and now operates at least partially as a pure income redistribution scheme. Charles Blahous lays out the facts and the implications in an excellent article, The Dark Side of the Payroll Tax Cut, which I have excerpted here:

In December 2010, President Obama and Congress reached an agreement whereby the Social Security payroll tax would be cut by two percentage points in 2011—from 12.4 percent to 10.4 percent—as a temporary stimulus measure. The president later proposed that the cut be extended and expanded in 2012. Before Congress went home at the end of 2011, it passed a 60-day extension of the two-point tax cut. The payroll tax cut has now been further extended to last throughout 2012 at least.
Most public discussion of the payroll tax cut has pertained to its efficacy (or lack thereof) as economic stimulus. Its greater policy significance, however, lies in another provision tucked into the same law. This provision is now transferring more than $215 billion in general tax revenues (e.g., income taxes) into the Social Security Trust Fund to make up for the reduction in payroll tax revenue.
In other words, the payroll tax cut is not really reducing the amount of tax revenues committed to Social Security. All that it actually does is to shift the Social Security financing burden from covered workers to others—most notably, to those Americans who pay income taxes. This is a transformative change to Social Security, reflecting goals for broader income redistribution now ascendant on the left end of the American political spectrum.
The new policy ends the longstanding requirement that Social Security expenditures be limited to the total amount of its tax collections (plus interest). And, by subsidizing payments with income taxes, it ends the idea that the Social Security benefits are fully “earned” by recipients.
The recent shift to income-tax-financing embodied in President Obama’s payroll tax cut policy cannot be said to represent a bipartisan agreement with this new policy view. Instead, the payroll tax cut was first proposed on the basis that it was necessary for economic stimulus, and later extended with the argument that doing otherwise would impose a painful tax increase on working Americans. The fact that the law also contained a provision to begin significant subsidization of Social Security with income taxes only belatedly gained the notice of the press, and not yet of the general public.
A critical milestone has nevertheless been passed. Beginning in December 2010, and continuing through to the present time, the federal government has embraced the policy of committing income taxes to subsidize benefits beyond those that Social Security itself can finance. Unless this policy is rapidly reversed, readers of this article who pay income taxes should brace themselves for the substantial new taxes they will soon be paying to bail out Social Security.

This is a very important article that deserves your attention. It's a "camel's nose under the tent" story of how and why our federal government's primary function these days is to redistribute income—60% of federal spending now consists of transfer payments—and how income redistribution will continue to expand unless it is forcibly rejected by the voters. Taking money from the more productive members of our society and handing it out to the less productive members can only result in the impoverishment of all, since it creates terribly perverse incentives to work less.

HT: Glenn Reynolds, one of America's MVPs.

P.S. Oh, and by the way, the payroll tax cut is one of the worst ways to use the tax code to stimulate the economy, since it does nothing to reward more work and risk-taking. So this whole "stimulus" program has not only harmed the economy, it's been used as a way to sneak greater income redistribution into our already bloated, redistributionist government. 

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