Debt Digest | Repealing Income Taxes on Social Security Benefits is Neither Fair nor Fiscally Responsible
Links & Fiscal Facts
Governor Tim Walz received an F on Cato’s fiscal report card. Governor Tim Walz, Kamala Harris’s running mate, received an F on Cato’s Fiscal Policy Report Card, which evaluates governors’ tax and spending records. Only seven governors scored lower. Since his election in 2018, Walz has pushed for higher taxes and spending, including a 2020 budget proposal with $2 billion in new spending and $1.3 billion in new taxes. In 2021, he proposed raising the top income tax rate and increasing the corporate tax rate, though these proposals failed. Minnesota ranked 45th in the state business tax competitiveness index, with our colleague Chris Edwards noting that Walz is in denial about interstate competition realities.
Repealing income taxes on Social Security benefits is neither fair nor fiscally responsible. A recent New York Times article by Andrew Duehren discusses GOP presidential candidate Donald Trump’s proposal to eliminate income taxes on Social Security benefits. He quotes me: “Romina Boccia, the director of budget and entitlement policy at the libertarian Cato Institute, said ending taxes on Social Security would shift more of the burden for paying for the benefits onto younger workers. ‘I can see the political calculations behind this proposal, but from a tax fairness perspective and a generation fairness perspective, it is a very bad proposal [...]’” Repealing taxes on Social Security benefits would also be costly and regressive. Cato’s Adam Michel proposes taxing 85 percent of all Social Security benefits, eliminating current income thresholds below which benefits are exempt from taxation.
The surge in inflation was primarily driven by demand and monetary policy shocks. A study by Kristin Forbes, Jongrim Ha, and M. Ayhan Kose found that the majority of interest rate increases and inflation hikes in the US from 2020 to 2023 were driven by demand shocks, such as fiscal stimulus packages, and monetary policy. As shown in Figure 2 below, 75 percent of increases in interest rates and 58 percent of the inflation surge can be traced back to these shocks. The study’s results aren’t surprising, considering Congress authorized $6 trillion in emergency spending, and the Federal Reserve expanded its asset holdings by $4 trillion during the same period. Jack Salmon, Director of Policy Research at Philanthropy Roundtable, argues: “[A] primary cause of sustained high inflation was unfunded fiscal stimulus, especially ARPA [American Rescue Plan].” See his thread on X for the list of studies that support this thesis.
Pro-growth tax reform requires spending cuts. Cato’s Adam Michel suggests that the revenue losses from the 2017 Tax Cuts and Jobs Act (TCJA) could have been offset by 2028 through boosted investment and economic growth, meaning the TCJA would pay for itself. However, various economic and legislative developments after 2017 lowered projected revenues. Given these factors, Michel notes that while revenues are expected to return to pre-TCJA levels by 2026, they aren’t projected to rise sufficiently to cover the initial tax cut losses. Whether the tax cuts paid for themselves or not, we shouldn’t lose sight of this important point that Michel raises: “Congress currently spends $2 trillion more than it raises in revenue, and no pro-growth tax cut can fix a $2 trillion (and growing) budget imbalance. To keep taxes low for the long run, Congress must decisively cut spending and prioritize the most pro-growth tax reforms.” See the new Cato Tax Plan here.
End Zombie spending. According to a Congressional Budget Office (CBO) report, “CBO identified 1,264 authorizations of appropriations that expired before the beginning of fiscal year 2024 and 251 authorizations that are set to expire before the end of the fiscal year. CBO also found that $516 billion in appropriations for 2024 was associated with 491 expired authorizations of appropriations.” Notably, “49 percent of authorizations identified for this report expired at least a decade ago; the oldest expired in 1980.” Congress is increasingly bypassing the two-step process of authorization and appropriation by skipping the re-authorization of expired programs. This leads to a lack of oversight and an increase in wasteful spending. As I have written before, “As sunset dates near, lawmakers should compare intended with achieved outcomes and consider whether it makes sense to reauthorize certain programs or whether it’s best to let them die. But this process only works if lawmakers follow it as intended. Instead, Congress has adopted a bad habit of waiving the rules and allocating monies to expired ‘Zombie’ programs anyway.”
