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NBER: My WSJ piece today: How to Make the Tax System Fairer and Save Social Security
My WSJ piece today: How to Make the Tax System Fairer and Save Social Security
Originally published in THE WALL STREET JOURNAL July 19, 2017
How to Make the Tax System Fairer and Save Social Security
It's time to expand the payroll tax to include health insurance plans
offered by employers.
By MARTIN FELDSTEIN
The U.S. faces two major fiscal problems. Fortunately, there is a simple
solution to both that also improves the fairness of the tax system.
The first problem is the size of the overall budget deficit. It is
large—2.6% of GDP or $450 billion this year—and will continue to get larger
even if tax reform leads to substantially faster economic growth. This is
particularly true if Congress increases the defense budget, as it should,
to 4% of gross domestic product and if the revenue-raising border
adjustment tax is not fully implemented. Large budget deficits reduce
investment and growth and hinder a nation’s ability to respond to military
and economic crises.
The second fiscal problem is that Social Security is in financial trouble.
Current benefits for retirees already exceed the system’s payroll-tax
receipts. Benefits are therefore payable under current law only by drawing
on the so-called trust fund, an accounting record of previous Social
Security surpluses. The Congressional Budget Office estimates that the
trust fund’s balance is rapidly declining and will be exhausted by 2030.
The amount Social Security pays out every year will then exceed what it
takes in by more than $400 billion. The government will face the choice of
cutting all individual benefits by about a third, raising the payroll tax
by 50% (from 12% to 18%), or using $400 billion a year of income-tax
revenue to supplement the payroll-tax funds.
Both of these problems can be solved by correcting an anomaly in the
current tax system. Health insurance that employees receive from their
employer is not currently subject to either the income tax or the payroll
tax. Sixty percent of American employers collectively spend more than $1
trillion a year to provide such benefits. If these benefits were subject to
the payroll tax like all other forms of employee compensation, the
government would collect an extra $135 billion this year. That extra
revenue would be automatically credited directly to the Social Security
trust fund.
These extra payroll-tax receipts would reduce the overall budget deficit
over the next decade by as much as $1.7 trillion and would add that much to
the Social Security trust fund. By 2030 the trust fund balance would
continue to grow to $2.7 trillion and the national debt would be $2.7
trillion smaller than it would otherwise be.
A flush trust fund would allow the Social Security program to be put on
firmer financial footing, just as it was after the 1983 reform gradually
raised the age for full retirement benefits from 65 to 67. Since 1983 the
average life expectancy of Americans in their 60s has increased by three
years, suggesting that the age for full benefits might be raised now from
67 to 70 for those who are currently younger than 50.
The combination of the payroll revenue achieved by the three year delay in
retirement eligibility and the 13 years of extra GDP growth by 2030 would
raise the payroll-tax revenue in 2030 by about $260 billion, or 1% of
projected GDP, implying a reduction of that year’s budget deficit by the
same amount.
Taxing employer payments for health insurance would create better incentive
effects than increasing personal income-tax rates. Because the tax would be
applied to existing benefits, it would not raise marginal rates and
therefore would not reduce the incentive to work or to invest.
The direct effect of taxing employer payments for health insurance would be
to make such benefits more expensive to employees, accelerating the trend
toward policies with higher deductibles and copayments. That in turn would
help limit the rise in spending on health care that pushes up national
prices for hospital care and other health services.
Although no one likes to pay more in taxes, it is hard to deny that the
existing system of giving large tax benefits to Americans who happen to get
health coverage from their employers is unfair to those who pay tax on all
of their compensation. Expanding the payroll tax would improve the fairness
of the tax system while shrinking the overall budget deficit and
strengthening Social Security. It should be part of the tax-reform
legislation Congress enacts later this year.
Mr. Feldstein, chairman of the Council of Economic Advisers under President
Ronald Reagan, is a professor at Harvard and a member of the Journal's
board of contributors.
Received on Thu Jul 20 2017 - 07:58:36 EDT
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