<html> <head><style type ="text/css">body { font-family: "Bloomberg Prop Unicode I", Verdana, sans-serif; font-size:125%; letter-spacing: -0.3pt; color: #FF9F0F; background-color: #000000; text-align: left; } p {line-height: 1.25em; max-width:900px; width:expression(document.body.clientWidth > 900? "900px": "auto" );} h1, h2, h3 { text-align: left; font-weight: normal; color: #FFFFFF; } h1 { font-size: 130%; } h2 { font-size: 115%; } h3 { font-size: 100%; } #bb-style { font-size: 90%; max-width:900px; width:expression(document.body.clientWidth > 900? "900px": "auto" ); } b, strong { font-weight: bold; } i, em { color: #FEC54A; } pre { font-family: "Andale Mono", "Monaco", "Lucida Console"; letter-spacing: -0.3pt; line-height: 1.25em; } table { border: 0; font-size: 90%; width: 100%; margin-left: auto; margin-right: auto; } td, tr { text-align: left; } td.numeric { text-align: right; } a:link { color:#53B2F5; text-decoration: none; } a:visited {color:#53B2F5} a:active {color:#53B2F5} a:hover {color:#53B2F5} </style> </head> <body> <p>By Joseph J. Thorndike</p><p>Want to build a welfare state to stand the test of time? Then don&#x2019;t be afraid to use regressive taxes to pay for it.</p>&#xD; &#xD; <p>That&#x2019;s the lesson we can take from Franklin Delano Roosevelt's decision to fund Social Security with a payroll tax.</p>&#xD; &#xD; <p>The FICA tax, which the federal government collects from you and your employer, is such a fixture of American public finance -- and so integral to Social Security -- that it&#x2019;s easy to forget how divisive it was when first implemented. Many New Dealers considered it unfair and unwise: unfair because it was regressive and unwise because it threatened to slow recovery by curbing consumption.</p>&#xD; &#xD; <p>Roosevelt rejected such complaints, and insisted that Social Security be financed solely through worker contributions. His argument was moral and political, not economic. "We must not allow this type of insurance to become a dole through the mingling of insurance and relief," <a href="http://www.presidency.ucsb.edu/ws/index.php?pid=14777#ixzz1NYocORKJ">he said</a>, in a typical statement, in 1934. "It is not charity. It must be financed by contributions, not taxes."</p>&#xD; &#xD; <p>In making this distinction, FDR showed that he understood a key element of human nature: People value what they pay for. Give them something for nothing, and that&#x2019;s the value they&#x2019;ll assign to it. This logic runs contrary to the conventional wisdom that a free lunch is always welcome. No doubt it is, at first. Ultimately, though, a little sacrifice builds security.</p>&#xD; &#xD; <p>FDR made this point while defending the payroll tax against the charge that it was regressive. "I guess you&#x2019;re right on the economics," <a href="http://www.ssa.gov/history/Gulick.html">he conceded to Luther Gulick</a>, a leading expert on public administration, "but those taxes were never a problem of economics. They are politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program."</p>&#xD; &#xD; <p>With the benefit of hindsight, Roosevelt's prescience is striking. For the last 75 years, his contributory model has insulated Social Security from its enemies. Even after Congress began weakening the link between contributions and benefits (a process that began just four years after the program&#x2019;s creation), Americans continued to view Social Security as an earned right.</p>&#xD; &#xD; <p>The contributory model has also changed public perceptions of other social welfare programs. Recall the famous Tea Party rallying cry: "Keep your hands off my Medicare!" Medicare was never designed to be funded like Social Security; from the start, it has been dependent on general revenues. But Americans consider it bought and paid for, just like Social Security.</p>&#xD; &#xD; <p>Critics still assail the payroll tax for being regressive. But the United States is hardly alone in using regressive levies to pay for social programs. In particular, governments around the globe use value-added taxes to pay for expansive welfare states.</p>&#xD; &#xD; <p>In the years ahead, America&#x2019;s comparatively modest welfare state will draw&#xA0;a lot of&#xA0;scrutiny. Conservatives and fiscal hawks have already put Social Security and Medicare under the microscope, focusing on their projected shortfalls (much larger for the latter than the former). Champions of both programs are girding for battle.</p>&#xD; &#xD; <p>As they mount their defense, liberals -- most of whom resisted calls for a value-added tax during the recent health-care debate -- might do well to ponder FDR&#x2019;s paradoxical insight: Regressive taxes can be put to progressive ends.</p>&#xD; &#xD; <p>(Joseph J. Thorndike is a contributor to the Echoes blog. The opinions expressed are his own.)</p>&#xD; &#xD; <p>To contact the author of this blog post: Joseph J. Thorndike at jthorndike@thorndike.com.</p>&#xD; &#xD; <p>To contact the editor responsible for this post: Timothy Lavin at tlavin1@bloomberg.net.</p> </body> </html>