Tax Myth Should Meet Its Reckoning

President Reagan has attacked Michael S. Dukakis as “a true liberal who raises taxes”; George Bush adds that under no circumstances will he raise taxes. The Dukakis defense: He’ll increase taxes only “as a last resort.” We seem doomed to a presidential campaign rooted in the myth that the Reagan-Bush Administration has reduced taxes and avoided enacting future tax increases.

It’s not true. On average, we now pay nearly 19% of our incomes in personal taxes, up from roughly 18% in 1980. While many Americans saw their federal income taxes decline during the Reagan presidency, we experienced two increasing tax burdens.

First, for all but the wealthiest taxpayers, higher Social Security taxes more than offset income-tax reductions; this new revenue to the Social Security fund has been diverted to pay for other programs.

Second, state taxes have increased--in part because the Administration has shifted responsibility for many services from national to state government, where programs still must be paid for by taxes.

Last year a big share of federal government expenditures was borrowed. The remainder, paid for by tax collections, still represented 15% of gross national product--no decline from the share of GNP collected as federal taxation in 1980 when the debt was much smaller. With the accumulated debt increasing every year, the government’s interest payments automatically increase, necessitating tax increases.

Yet presidential campaign rhetoric proclaims that taxes have gone down and need not go up now. Why do the American people accept a myth that their own experience belies?

Partly it’s because the Administration is manipulating the Social Security fund. Payroll taxes have increased from 6.1% in 1980 to 7.5% today. It’s our most regressive tax--earnings more than $45,000 are not taxed. Social Security levies went up this year, and are due to increase again in 1990.

But most Americans have been led to believe that these are not “taxes,” but rather “contributions” toward our pensions. So in 1983, when the Administration proposed making Social Security actuarially sound, Americans accepted contribution increases with little protest--feeling secure that the money would be used to build surpluses for the benefit of the baby-boomers when they retire.

Yet the Reagan Administration and Congress have used this new surplus to pay for expanded government programs--agricultural subsidies, military hardware and interest costs on the growing debt. Technically, the Social Security fund has lent its surplus to the U.S. Treasury, but the surplus is not invested in activities that guarantee future repayment.

In 1987 working Americans and their employers contributed nearly $220 billion to the Social Security fund. Most was paid out in benefits, but nearly $20 billion was effectively converted into an additional income tax, paying for other government programs. In 1988, $37 billion of our Social Security taxes will be so diverted; in 1992, more than $70 billion.

By 1992 nearly one-fourth of our contributions for Social Security will be disguised general taxation, nearly equal to a 4% tax on wages. Beyond 1992, when the ratio of retirees to active workers is expected to decline, the diverted surplus will continue to grow.

Public attention has now been focused on the wisdom of using Social Security surpluses to finance budget deficits. Sen. Daniel Patrick Moynihan (D-N.Y.) argues that we are fortunate to be able to use this windfall for the Treasury. There’s plenty of time, he suggests, to worry about increasing Social Security funds before baby-boomers start to retire in 2010. Journalist Charles Krauthammer argues that we can use these funds to cut budget deficts and still have money to pay retirement benefits if we acknowledge health advances and raise the future retirement age to 71.

But these and similar proposals share a pervasive dishonesty, failing to question the propriety of telling Americans that 7.5% of their income (an amount doubled when combined with their employers’ matching contributions) is being taken as retirement savings while a substantial part of this money is quietly converted to a tax for deficit reduction.

If, for example, we want to postpone retirement to 71, Social Security taxes should be reduced to the amount actuarially required to support a smaller retiree population. We could then, if we wanted to, increase real taxes by the same amount to finance other government programs.

The amount of money coming out of Americans’ income would be identical; the share paying for old-age benefits or flowing to the federal Treasury would also be unchanged. But this honest approach would force Americans to confront reality; we have not magically escaped the consequences of Reaganomics--our taxes have been going up to reduce the federal budget deficit. We could then conduct a presidential campaign based on real alternatives and choices rather than mythology. Instead of a fantasy of lower taxes, we could discuss what kinds of tax increases are fair and what they should be used for.