Will the GOP tax-reform package open up a back door to action on entitlements?
posted at 4:01 pm on April 15, 2017 by Ed Morrissey
Donald Trump repeatedly promised, during and after the election, that he would not entertain proposals for entitlement reform. In fact, that was one of the earliest promises Trump made, going all the way back to an interview with CBN’s David Brody in May 2015, a promise which Brody reminded his viewers just seven weeks ago that Trump was keeping thus far. OMB director Mick Mulvaney emphasized that in an interview this week with John Harwood on his CNBC show Speakeasy, even though Mulvaney himself would prefer to focus on reforming Social Security and Medicare to begin unwinding tens of trillions in unfunded mandates:
HARWOOD: Donald Trump is a very different kind of president. How do you go about melding what you bring to the table with what he brings to the table? One of your friends in the House told me, “That budget looks a lot more like a Mick Mulvaney budget than a Donald Trump budget.”
MULVANEY: I’ll tell how I wrote it. And then you can decide for yourself. We looked at the speeches to try and figure out where he wanted to spend more money. And then we also had instructions not to add to the deficit. I laid to him the options that Mick Mulvaney would put on a piece of paper. And he looked at one and said, “What is that?” And I said, “Well, that’s a change to part of Social Security.” He said, “No. No.” He said, “I told people I wouldn’t change that when I ran. And I’m not going to change that. Take that off the list.” So I get a chance to be Mick Mulvaney. I get a chance to have those same principles. And I give ’em to the president, and he makes the final decisions.
But have Republicans and the White House come up with a back-door opening to indirect entitlement reform? According to the Associated Press, the tax-reform package that will follow the repeal of ObamaCare (or maybe eclipse it) might contain a repeal of the payroll tax as a means of economic stimulus. That would end the contribution-based funding system for Social Security and some of the funding for Medicare as well:
One circulating this past week would change the House Republican plan to eliminate much of the payroll tax and cut corporate tax rates. This would require a new dedicated funding source for Social Security.
The change, proposed by a GOP lobbyist with close ties to the Trump administration, would transform Brady’s plan on imports into something closer to a value-added tax by also eliminating the deduction of labor expenses. This would bring it in line with WTO rules and generate an additional $12 trillion over 10 years, according to budget estimates. Those additional revenues could then enable the end of the 12.4 percent payroll tax, split evenly between employers and employees, that funds Social Security, while keeping the health insurance payroll tax in place.
This approach would give a worker earning $60,000 a year an additional $3,720 in take-home pay, a possible win that lawmakers could highlight back in their districts even though it would involve changing the funding mechanism for Social Security, according to the lobbyist, who asked for anonymity to discuss the proposal without disrupting early negotiations.
As I write in my column this week for The Fiscal Times, that would require a complete restructuring of Social Security, or its transition to an explicit form of welfare rather than savings. While entitlement reform is a necessity, that might not be the best way to go about it. Forcing it to originate from the general fund could lead to some unintended consequences, and make matters worse rather than better:
Alarms have already sounded in some quarters over this idea. “This proposal is a Trojan horse,” Nancy Altman of the activist group Social Security Works told Los Angeles Times liberal columnist Michael Hiltzik, who added that “it smells like a back-door way of cutting Social Security benefits.”
At conservative outlet Newsmax, Brenton Smith agreed, warning that such a move would fully transform Social Security into a welfare program. “What happens when we actually run Social Security like welfare? First,” Smith points out, “the people who are not eligible will demand access to benefits,” including those who have opted out of contributions. The requirement for contributions also provides a natural limit on benefit payouts, Smith points out, that would get eclipsed instead by political decisions driven by voter demands. That may already be true to some extent with Social Security and Medicare, but Smith’s warning of a Katy-bar-the-door environment in the absence of system limits is worth noting.
If this idea is indeed a back-door method to get to Social Security reform without forcing Trump to break his campaign pledge, it seems more problematic than it’s worth. Tax reform has better potential for economic stimulus by focusing on simplification and flattening of individual and corporate income tax codes, the latter of which will also boost efforts to keep American firms from relocating outside the US for tax benefits. Entitlement reform needs to be tackled head-on rather than obliquely, especially if the effort risks turning contribution-based entitlements entirely into general-fund welfare programs.
The tax-reform package is still in the negotiation phase, so it’s not clear how serious the idea of repealing the payroll tax is at the moment. Paul Ryan noted after the initial failure to pass the AHCA bill that only the House had a full proposal ready:
“The House has a (tax reform) plan but the Senate doesn’t quite have one yet. They’re working on one. The White House hasn’t nailed it down,” Ryan told an audience in Washington.
“So even the three entities aren’t on the same page yet on tax reform,” he added.
That was only ten days ago, so the chances seem slim that the three entities have firmly agreed on components yet, especially since lawmakers have been on recess most of that time. Hopefully, the first move on Social Security reform — when it comes — will be to reinforce its contributory nature by shifting ownership of those funds to contributors, rather than ditching the contribution system altogether.