Don't Forget Fiscal Discipline
There's a way to cut the deficit while strengthening the social safety net. The upper middle class won't like it.
The first person who led me toward becoming a Democrat was Bill Clinton. I was eleven when the 1996 election took place, and it was around then I started learning the differences between the two major parties. Though I was too young to fully grasp the nuances of this, I liked that Democrats generally seemed to prefer a strong federal government, instead of Republicans’ preference for state and local power. It seemed fairer and less arbitrary, more likely to protect rights and freedoms, and in many ways it still does. Reading about what 20th century Democratic presidents got passed - the right to unionize and strike, the minimum wage, the Peace Corps, the Civil Rights and Voting Rights Acts - helped convinced me they were the party I would join.
Clinton’s policy choices, and their effects on the 1990s in which I grew up, further strengthened my Democratic convictions. A booming economy, reductions in crime, millions lifted out of poverty, and America dominant on the world stage were improvements over past eras, with their depressions and unrest and devastating wars. While many important figures contributed to the goods of the era, many of Clinton’s policies - NAFTA, a larger earned income tax credit (EITC), more police on the streets, a “light touch” approach to the early internet, military interventions in the Balkans - had significant positive impacts.
I don’t agree with every decision Clinton made. Two major choices in his last year in office - free trade with China and non-regulation of derivatives on Wall Street - undermined American manufacturing and helped set up the 2008 financial crisis. I also remain disappointed with his treatment of Monica Lewinsky, both during and after their affair. Overall, though, I believe his eight years in the White House were good for America. They were also good for the Democratic Party - among other things, they taught Democrats the importance of fiscal discipline, a lesson the party would do well to remember.
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There was good fiscal news this October: the federal budget deficit fell by half over the last year, from $2.776 trillion to $1.375 trillion. This was not because our leaders consciously decided to cut spending or raise taxes, but because financial stimuli passed in response to COVID ran out. Still, even an unintended deficit reduction is a good thing when the economy is growing.
Soon, however, the deficit will be a problem again. Congressional Budget Office projections show it gradually rising over then next decade, “averaging about $1.6 trillion annually between 2023 and 2032.” The CBO also expects the national debt to equal 110% of gross domestic product ten years from now, compared to 98% now.
The Federal Reserve has steeply raised interest rates this year to combat high inflation, and looks set to do so again. Thus, the government will have to devote more and more public funds to interest on a growing national debt. Unless, that is, Congress and the Biden administration take a stab at reducing the deficit without needlessly slowing the economy. There is a way to do so, one that would also strengthen the largest component of the American economic safety net: Social Security.
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Because I'm a hopeless policy nerd, I occasionally visit the website of the Committee for a Responsible Federal Budget. They have some interesting (to dorks like me) interactive tools that let you unleash your inner budget hawk. My favorite is the Reformer: how to keep Social Security solvent and avoid cuts to the benefits of all recipients. There are many ways to do this, each with its own impact on the gap between what the program takes in and what it owes. As wonderful as it would be to enact some of these reforms with the overarching goal of keeping Social Security going, perhaps it’s better to take a more modest step toward solvency with just one of CRFB’s suggestions.
The Social Security payroll tax (6.2% of a worker’s income, matched by their employer) applies only to the first $147,000 of wages (the amount rises annually with inflation). Currently, according to CRFB, unless no changes are made, Social Security will become insolvent in 2035, “at which point all beneficiaries will face a sudden 20% benefit cut.” Eliminating the payroll tax cap pushes insolvency back to 2059, and reduces the benefit cut to 12%. It would also take a chunk out of the budget deficit - for the first six or seven years after making this change, Social Security would take in more in payroll tax than it paid in benefits.
We could go even further. In the Reformer, ending the payroll tax cap increases overall benefits paid starting around 2040. Those benefits would likely go to high earners, as they would be the ones paying more into the program. But we could change it so there were no increase in benefits for those who saw their tax go up. That would improve solvency without giving an unnecessary windfall to people who are faring quite well.
Like many policies that would do good things for most Americans, this option would entail political risk. For one thing, President Biden would have to go back on his pledge not to raise taxes on households earning under $400,000. But that pledge was a mistake to begin with - it has constrained his ability to fund his priorities - and the sooner he abandons it, the better. If he needs to muster up courage to ask for sacrifice from the upper middle class as well as the rich, he can look to the courage Clinton showed in 1993, when he first proved his commitment to fiscal responsibility.
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Clinton campaigned in 1992 on the promise of a middle class tax cut. But when he came into office, it became clear that the size of the budget deficit (a lingering result of Ronald Reagan’s tax cuts and defense buildup) would prevent him from keeping that promise. However, the first budget he pushed through Congress proved crucial to showing that a Democratic president - after decades of his party being slandered as “tax and spend” left-wingers - could be prudent with the nation’s finances. (Joe Klein provides an excellent overview of this budget battle in his book, The Natural: The Misunderstood Presidency of Bill Clinton.)
The August 1993 legislation - which passed the House of Representatives by one vote, and required a tie-breaking vote by Vice President Al Gore to pass the Senate - raised the marginal income tax rate for the highest earners from 31% to 39.6%. It increased the alternative minimum tax (also aimed at the highest earners) and the corporate income tax. Notably, it also eliminated the cap on the Medicare payroll tax. Previously, income over $135,000 had been shielded from the tax devoted to Medicare. ($135,000 in August 1993 would have been $276,720.17 in September 2022.)
While the bill included an expansion of the EITC for the working poor, the goal of these tax increases was deficit reduction, not new spending. They helped lay the groundwork for the 1990s boom, a period of low unemployment, low inflation, and reduced poverty, fueled by private-sector growth encouraged by a government that balanced its budget. And while backtracking on his middle class tax cut hurt Clinton politically in the short term, it did not prevent him from being reelected in 1996.
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Removing the payroll tax cap is not the only way to strengthen Social Security - CRFB lists 21 options that would improve solvency, plus six that would increase spending. Nor is it the only way to reduce the deficit - we could also start eliminating tax deductions and exemptions that benefit the affluent. But ending the cap would be a nifty way to do both at once.
Asking people to sacrifice is difficult, especially when you’ve told them they won’t have to. No doubt Biden would be embarrassed to call for higher taxes on the upper middle class after insisting that only the truly rich had to pony up in the national interest. But such awkwardness is a price worth paying for fiscal responsibility.
The upper middle class is doing just fine. A person making “only” $175,000, say, is faring quite well financially. They don’t need to be shielded from a tax increase, particularly one that would also keep Social Security going. The sooner Biden looks them in the eye and tells them that, the better.