‘Case of the Week’ 2 (Stoa): Raise the SS Tax Cap

Important Disclaimer: We pretty much just throw these together over the weekend, and don’t put a lot of work into them. Case of the Week cases are not subject to the same editorial process and stringent quality standards as the COG 2011 sourcebook, and are frequently contributed by non-COG authors. You will likely find material and sources in these cases that would not appear in the sourcebook. Also the backups are not intended to be complete. That said, we hope these cases will be useful to you; enjoy!

About the Author: Josh Wilson, formerly known for dominating NCFCA Region 5 in 2009-2010, is currently entering his sophomore year at Kansas State University where he is pursuing a degree in legal communications and participates in collegiate mock trial. Josh is a COG 2011 author.

1AC: Raise the Social Security Tax Cap

By Josh Wilson

In 2016, projected outlays for Social Security will begin to exceed the tax revenues earmarked for the program (see the top panel of Figure 5). Once that happens, the federal government will need to draw on other resources to fund Social Security, even though the trust funds will continue to be credited with interest on the balances in the funds. The economic and budgetary effects of having outlays exceed tax revenues are the same with or without trust funds.

The financial structure of the Social Security program has resulted in a redistribution of resources between generations: each generation of workers pays taxes that are largely used to make payments to the people already eligible for benefits. From Social Security’s earliest days, a contentious issue was whether the benefits that workers and their families received should be prefunded using the taxes that those workers paid, rather than the taxes paid by current workers. As the program was enacted in 1935, revenues dedicated to Social Security would have exceeded outlays by enough to build up very large surpluses. In effect, those excess revenues would have helped fund, in advance, the benefits that the same workers would receive later. Opponents of prefunding argued that such an arrangement would result either in pressure to increase spending or in federal government ownership of private assets. Later expansions to the program, along with postponement of increases in the payroll tax rate that were originally scheduled to occur during the 1940s, essentially moved Social Security to a pay-as-you-go basis.(23)

That pay-as-you-go structure has worked, although with many changes in taxes and benefits along the way. But it has worked largely because the labor force has grown rapidly during much of the program’s history. That situation is about to change, as the number of Social Security beneficiaries begins to increase much faster than the number of workers.”

That was a quote from the United States Congressional Budget Office (“Social Security: A Primer, Chapter 2: An Overview of the Social Security Program” September 2001 http://www.cbo.gov/doc.cfm?index=3213&type=0&sequence=3)

It is in order to correct these problems that my partner and I stand resolved: that the United States Federal Government should significantly reform its revenue generation policies.

OBSERVATION 1. DEFINITIONS/ANALYSIS

To start things off let’s define some of the key words in the resolution just so that everybody is on the same page. Sources will be given upon the negative’s request.

Significant: “Important; of consequence” (Random House Websters College Dictionary, 1999 “Significant”)

Reform: “To put or change into an improved form or condition” (Merriam-Webster Online Dictionary. 2009 http://www.merriam-webster.com/dictionary/REFORM)

Revenue generation policies: “Policies that determine the rates of taxation; the things that are taxable and the things that are exempt; the revenue administration system, which is the way in which the policies are implemented and revenue is actually collected; and the extent of economic activity, the things that can be taxed.” (POLITICAL ECONOMY RESEARCH INSTITUTE, “OPTIONS FOR REVENUE GENERATION IN POST-CONFLICT ENVIRONMENTS” Michael Carnahan (PhD in economics from the University of Wisconsin at Madison, visiting fellow at the Crawford School of Economics and Government, Australian National University. Served as senior adviser to the Minister of Finance in Afghanistan in 2002–04, and as director of the Budget Office in the East Timor Transitional Administration in 2000–01. Worked in the Departments of Treasury and Finance in the Australian Government.) http://www.cic.nyu.edu/peacebuilding/docs/Revenue%20Generation%20in%20Post-Conflict%20Environments.pdf)

B. ANALYSIS: Now that we know what we’re talking about let’s move on to our case where my partner and I will show that the status quo revenue generation policy will lead to the bankruptcy of social security, but that we can correct the situation by reforming our revenue generation policy. We do not claim to create utopia; rather, we need to prove that our plan produces results that are better than the status quo. When this is shown, we believe you will have every reason vote affirmative.

INHERENCY/HARMS: Now let’s see how things currently stand

1) Social Security is predicted to collapse by 2036

Bill Bischoff (tax specialist and licensed CPA for 25 years, tax columnist for Smart­Money.com) “Just What You Needed: Higher Taxes” May 26, 2011 http://www.smartmoney.com/taxes/income/just-what-you-needed-higher-taxes-1306271420886/?zone=intromessage&zone=intromessage

“Another misunderstanding about Social Security: Some people think the government has set up an account with their name on it to hold the money to pay for their future Social Security benefits. After all, that must be where all the Social Security taxes on people’s wages and self-employment income go, right? Wrong. There are no individual accounts. In fact, when the Social Security system runs a surplus (which it has in most years until now), the federal government sucks out the excess cash and issues the system an IOU. But the only way those IOUs will ever be paid is through future taxes. Meanwhile, the system is now projected to run out of money (including those nebulous IOUs) in 2036 unless taxes are raised or benefits are cut.”

Why is that so bad? Because,

2) Social Security is the primary source of income for seniors.

Edward N. Wolff (Ph.D. in economics from Yale University. professor of economics at New York University, Past president of the Eastern Economics Association, past consultant for the World Bank.) and Christian Weller (Ph.D. in economics from the University of Massachusetts at Amherst.) “Retirement Income The Crucial Role of Social Security” May 24, 2005 http://www.epi.org/publications/entry/book_retirement_income/

“For the typical person approaching retirement, the value of expected future Social Security retirement benefits represents the largest single source of wealth. That finding is consistent with the well-known fact that Social Security provides more than half of all income for about two-thirds of people over age 65.”

One of the problems with the current policy is that

3) it only charges social security tax on the first $106,000 that a person earns, people that earn more than that gets the rest of their income tax free.

Bill Bischoff (tax specialist and licensed CPA for 25 years, tax columnist for Smart­Money.com) “Just What You Needed: Higher Taxes” May 26, 2011 http://www.smartmoney.com/taxes/income/just-what-you-needed-higher-taxes-1306271420886/?zone=intromessage&zone=intromessage

“Thanks to the government’s official contention that there has been little to no inflation over the past few years, the Social Security tax ceiling has been stuck at $106,800 since 2009.”

4) This leads to much of the middle class actually being taxed at a higher rate than the wealthy!

John S. Irons (PhD in economics from MIT, past Senior Economic Research and Policy Analyst and Staff Economist at Office of Management and Budget Watch, Washington, DC) Before the United States Senate Special Committee on Aging Hearing on: “Social Security: Keeping the Promise in the 21st Century” June 17, 2009 http://epi.3cdn.net/4d02ba0975848f9a30_dym6b5ofe.pdf

 “Workers making $106,800 or less pay a flat 6.2 percent for Social Security on their earnings, as do their employers. Since the most employees and employers can each owe is $6,622 (6.2 percent x $106,800), the tax rate for someone earning a million dollars per year and their employer is just 0.66 percent ($6,622/$1,000,000), roughly one tenth the rate paid by most workers. Also, since upper‐income individuals receive more of their total income in the form of non‐payroll income—such as capital gains—they see a total Social Security liability that can be much lower than average taxpayers. In 2005, those with income in the top 5 percent received 13.2 percent of their income in the form of capital gains. Those in the top 1 percent and 0.1 percent received 17.3 percent and 19.1 percent of their income from capital gains, respectively (Piketty and Saez, 2007). Since this income is not subject to payroll tax and is also subject to a lower federal income tax rate than earned income, many wealthy families owe a lower share of their overall income in taxes than many middle-class families.”

OBSERVATION 3. PLAN

Fortunately there is something that we can do to make sure that we fulfill our promise to our seniors and make our system fair at the same time. Accordingly, we offer the following PLAN to be implemented by Congress and the President:

“Congress will pass legislation removing the social security tax ceiling.”

Any necessary Funding will come from existing budgets of existing agencies from general federal revenues. Federal courts will strike down any rules not in compliance with the plan. This plan will take effect immediately at the beginning of the next fiscal year. All Affirmative speeches may clarify the plan as needed.

OBSERVATION 4. SOLVENCY/ADVANTAGES

So now the good news:

1) Removing the tax ceiling will virtually eliminate Social Security shortfalls:

Josh Bivens (Ph.D. in Economics, Economist at the Economic Policy Institute.) “Removing the Social Security earnings cap virtually eliminates funding gap” February 17, 2005 http://www.epi.org/economic_snapshots/entry/webfeatures_snapshots_20050217/

“Removing the earnings cap on taxes and benefits improves the 75-year actuarial balance by 1.7% of payroll, thereby eliminating 90% of the funding deficit forecast by the SSA [Social Security Administration]. Removing the cap would completely eliminate the deficit forecast by the CBO [Congressional Budget Office] with its more plausible economic assumptions.”

2) Not only does it solve, but it won’t hurt those that get taxed more

John S. Irons (PhD in economics from MIT, past Senior Economic Research and Policy Analyst and Staff Economist at Office of Management and Budget Watch, Washington, DC) Before the United States Senate Special Committee on Aging Hearing on: “Social Security: Keeping the Promise in the 21st Century” June 17, 2009 http://epi.3cdn.net/4d02ba0975848f9a30_dym6b5ofe.pdf

“Eliminating the cap altogether—as was done for Medicare in 1993—would have a fairly modest impact on affected taxpayers, who are at the very top of the earnings distribution. The Congressional Research Service has projected that fewer than 8 percent of taxpayers would face higher taxes in any given year. A higher share (21 percent) would face higher taxes at some point by 2035, but the median increase in lifetime tax payments would be only 3 percent.”

And furthermore, 3) Most Americans support our plan

Ross Eisenbrey (J.D. Vice president of Economic Enterprise Institute, past staff attorney and legislative director in the U.S. House of Representatives, policy director of the Occupational Safety and Health Administration from 1999 until 2001.)“Americans agree on how to fix Social Security” September 16, 2009 http://www.epi.org/economic_snapshots/entry/americans_agree_on_how_to_fix_social_security/

“The most striking finding in the survey is that most Americans are willing to pay higher payroll taxes to preserve the Social Security program. When asked to respond to the statement: “It is critical that we preserve Social Security for future generations, even if it means increasing working Americans’ contributions to Social Security,” 77% of those surveyed said they agreed (see Figure). When presented with a specific way to strengthen Social Security, an even larger portion showed support. Of those surveyed, 83% said they supported lifting the Social Security tax cap of $106,800, so that high-income earners would pay the tax on all of their salary in the same way that lower-wage earners do. Because the projected shortfall in social security is much smaller and more manageable than is often presented, eliminating the cap on taxable earnings would bring in sufficient funds to close the projected Social Security shortfall over the next 75 years, solving the entire problem.

Judge, why should we endanger the livelihood of our nation’s seniors when we can fix the system, and make it fairer at the same time? That is why we respectfully ask you to join us today in affirming the resolution.

Backup: Remove the Social Security Tax Cap

Social security is most important income source for seniors

Josh Bivens (Ph.D. in Economics, Economist at the Economic Policy Institute.) “Social Security and income” November 18, 2004 http://www.epi.org/economic_snapshots/entry/webfeatures_snapshots_11182004/

“Figure 1 presents a summary of data collected by the Social Security Administration (SSA) from 2001. The SSA found that Social Security provided more than half of the total income for almost two-thirds of households comprised exclusively of those aged 65 and older and provided at least 90% of income for a third of this group”

Social Security is the only source of income after retirement for 1/5 of seniors

Edward N. Wolff (Ph.D. in economics from Yale University. professor of economics at New York University, Past president of the Eastern Economics Association, past consultant for the World Bank.) and Christian Weller (Ph.D. in economics from the University of Massachusetts at Amherst.) “Retirement Income The Crucial Role of Social Security” May 24, 2005 http://www.epi.org/publications/entry/book_retirement_income/

“In terms of the adequacy of workers’ retirement savings, the data indicate that the retirement system outside of Social Security is a system with many holes. Despite large tax incentives from the federal government for workers to save for retirement, more than one-fifth of households nearing retirement (those between the ages of 56 and 64) had no retirement savings other than Social Security. In contrast, nearly everyone can expect to receive some benefits from Social Security.”

AT: “Only postpones SS collapse” Social security only needs intervention for baby boomer retirement

Harry C. Ballantyne (Chief Actuary of SSA since 1982) Lawrence Mishel (PhD in economics, President of the Economic Policy Institute) and Monique Morrissey (PhD in economics)“Social Security and the Federal Deficit” August 6, 2010 http://www.epi.org/publications/entry/social_security_and_the_federal_deficit/

“While it is true that Medicare spending will soar if health care cost growth is not brought under control, the same is not true of Social Security spending, which is projected to level off as a share of GDP after the Baby Boomer retirement.”

AT: “Only postpones SS collapse” Social security only needs intervention for next 75 year planning period

Harry C. Ballantyne (Chief Actuary of SSA since 1982) Lawrence Mishel (PhD in economics, President of the Economic Policy Institute) and Monique Morrissey (PhD in economics)“Social Security and the Federal Deficit” August 6, 2010 http://www.epi.org/publications/entry/social_security_and_the_federal_deficit/

“Though modest changes will be needed to put Social Security in balance over the 75-year planning period, the projected shortfall is less than 1% of gross domestic product (GDP).”

Generic SS=cool

Dean Baker (PhD in Economics, co-director of the Center for Economic and Policy Research in Washington, DC.) “SAVING SOCIAL SECURITY IN THREE STEPS” November 1998 http://www.epi.org/page/-/old/briefingpapers/ss.pdf

 “Social Security has been an enormously successful program. Over the last 60 years it has lifted tens of millions of retired and disabled workers and their families out of poverty, and it provides the core income that allows workers to enjoy a dignified retirement without burdening their children or the public welfare. In contrast to many private sector insurance and retirement programs, Social Security achieves its goals with extremely low administrative expenses and few instances of fraud and abuse.”

AT: “This is a big tax in disguise” Benefits rise too

Josh Bivens (Ph.D. in Economics, Economist at the Economic Policy Institute.) “Removing the Social Security earnings cap virtually eliminates funding gap” February 17, 2005 http://www.epi.org/economic_snapshots/entry/webfeatures_snapshots_20050217/

 “This cap affects benefits as well: calculation of Social Security benefits are based on a formula that does not take earnings over the cap into account. Since higher income during one’s working life translates into higher Social Security benefits, removing the cap on the benefit side would increase Social Security payments to high-wage earners.”

AT “massive tax increase that we can’t deal with” empirically denied

Dean Baker (PhD in Economics, co-director of the Center for Economic and Policy Research in Washington, DC.) “SAVING SOCIAL SECURITY IN THREE STEPS” November 1998 http://www.epi.org/page/-/old/briefingpapers/ss.pdf

“While this would represent a significant tax increase, it would be far from unprecedented. For example, the increase in military spending associated with the Korean War and the start of the Cold War was 8.3% of gross domestic product (Figure B). Education spending increased by 2.8% of GDP between 1946 and 1966 when the baby boomers were in school. In fact, Social Security actually increased by more as a share of GDP over the 35 years from 1960 to 1995 than it will increase over the 35 years from 1995 to 2030. In short, when it has been necessary to meet important public needs, the nation has repeatedly been willing and able to endure much larger burdens than that which Social Security will pose in the foreseeable future.”

Higher income individuals pay less on average than even the middle class

John S. Irons (PhD in economics from MIT, past Senior Economic Research and Policy Analyst and Staff Economist at Office of Management and Budget Watch, Washington, DC)“Raising cap on social security tax best way to fix shortfall” June 17, 2009 http://www.epi.org/analysis_and_opinion/entry/raising_cap_on_social_security_tax_best_way_to_fix_shortfall/

“The cap also means that higher-income individuals pay a smaller share of their income in Social Security taxes than middle-class employees. Including the employee and employer shares of Social Security and Medicare taxes, earners in the middle fifth of the income distribution pay an average effective payroll tax of about 11 percent. In contrast, the top 1 percent of earners pay just 1.5 percent on average.”

If cap isn’t raised then taxes must rise or benefits will be cut

John S. Irons (PhD in economics from MIT, past Senior Economic Research and Policy Analyst and Staff Economist at Office of Management and Budget Watch, Washington, DC)“Raising cap on social security tax best way to fix shortfall” June 17, 2009 http://www.epi.org/analysis_and_opinion/entry/raising_cap_on_social_security_tax_best_way_to_fix_shortfall/

 “Some will argue that an increase in the cap will create inefficiencies and cost jobs. Indeed, all else equal, I too would prefer to live in a world without taxes, but all else is not equal. If revenue is not generated by lifting the cap, it must be raised from other sources, or benefits must be cut.”

It solves

John S. Irons (PhD in economics from MIT, past Senior Economic Research and Policy Analyst and Staff Economist at Office of Management and Budget Watch, Washington, DC) Before the United States Senate Special Committee on Aging Hearing on: “Social Security: Keeping the Promise in the 21st Century” June 17, 2009 http://epi.3cdn.net/4d02ba0975848f9a30_dym6b5ofe.pdf

 “According to the Social Security Administration, fully eliminating the cap on taxable earnings would be sufficient to close the projected Social Security shortfall over the next 75 years. This assumes benefits for high earners remain unchanged. If, instead, newly‐taxed earnings above the taxable maximum were credited toward benefits, eliminating the cap would reduce the shortfall by 1.8 percent of taxable payroll, slightly less than the long‐term shortfall projected by the Social Security trustees.”

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One Response to ‘Case of the Week’ 2 (Stoa): Raise the SS Tax Cap

  1. TFK-FAN1 says:

    GREAT CASE!!!! My partner and I are going to run it (Rewritten of course) thanks for the idea!!!

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