Happy Fiscal New Year, Americans. In 2012, your paystub will feature an increasingly progressive income-tax structure and a temporary two-month partial payroll-tax holiday.
If there is no paystub in your mailbox, you may enjoy an (also temporary) extension of unemployment insurance and perhaps an earned-income tax credit, if your spouse works. At the same time, your lawmakers will be making the rich pay their “fair share” while assiduously pushing through cutbacks under the time-honored federal system of “baseline budgeting.” And if you know what all that means, you win an Android phone. But most of us don’t know. As it happens, more young Americans know what Google Inc.’s Android operating system is than know some basic facts about our politics, according to the Pew Research Center in Washington.
And who can blame them? Politics these days is dominated by phrases such as “baseline,” “progressivity” and “payroll tax.” These words are budget-ese, lexical obscurities. We accept on faith that when officials use such phrases the outcome won’t be too bad. Politicians always spoke budget lingo in the past, and their doing so didn’t seem to bring catastrophe on the country.
The problem is that this time, the budget-ese we’re not learning is allowing our legislators to get away with some deeply misleading claims, and it’s threatening to make our fiscal problems much worse.
First example: “budget cuts.” Lawmakers talk about the need for them all the time. Voters, for their part, welcome such cuts because they assume that such reductions make the government smaller. What the electorate often doesn’t understand is that, in the federal case, budget cuts often yield bigger government.
Bigger and Bigger
That’s because the federal government uses “baseline budgeting.” Under this method, the government assumes it will grow at a certain rate. Any reduction in the assumed rate of increase is counted as a cut, even as the government grows bigger and bigger. Larger government will mean higher taxes down the road, and, probably, higher costs for mortgages. That’s especially true now, because the government’s debt is at levels that generally provoke interest-rate increases. Because voters don’t want to confront that reality, they tolerate the lie of the baseline talk.
Second example: “making the rich pay their fair share.” The Democratic Congressional Campaign Committee is circulating a petition lambasting the Tea Party for opposing tax increases for top earners. The Tea Party types are wrong, the petition suggests, because they “don’t think millionaires and corporations should pay their fair share.”
So what is a fair share? In the rest of the English language, “fair” means proportionality. “Share” implies equality by percentage. A bigger man lifts a bigger load, in proportion to his size. But our tax system isn’t proportional. It’s progressive, with a graduated scale, so that the wealthier man pays more than his share. The bottom half of all earners pay less than 5 percent of the income tax.
Many Americans don’t know the difference between progressivity and proportionality, and that’s convenient to revenue-hungry Washington. When politicians tell voters that Congress is asking the rich to pay their fair share, voters typically approve. But there’s a limit to how many times the wealthy will tolerate these adjustments for fairness. When marginal tax rates approach 50 percent, as they do now, many of the wealthy are likely to decamp to jurisdictions outside the U.S., where taxes are lower. And they’ll probably bring their companies with them.
And a final, fatal confusion: the payroll tax. Just last week, President Barack Obama and leading Democrats shamed Republicans into going along with their payroll-tax holiday by telling the country that the Republicans were betraying their own commitment to tax cuts.
Actually, the Democrats are doing the betraying this time. That’s because the payroll tax isn’t a tax. It’s a pension payment into an insurance program created by the founder of the modern Democratic Party: President Franklin D. Roosevelt. Social Security is the jewel in the party crown. Because the mechanism that pays for the program is called a “tax” in budgeting lingo, many workers don’t realize this distinction. A holiday on your payroll tax now threatens to hurt your pension later, while tarnishing that jewel in the process.
It might seem odd that younger voters, especially, fail to recognize the perversity of the so-called payroll-tax holiday. Odd until you realize that Republicans have no problem with voter ignorance, either. The Republican Party doesn’t like Social Security precisely because it was Roosevelt’s. They want to expose it as a Ponzi scheme immediately. If Democrats want to engage in tax rewrites that accelerate the demise of this hallowed social program, Republicans think that’s just fine.
But without entitlement reforms, including a strengthening of Social Security, our budget troubles can’t be outgrown. When the federal debt gets high enough, and payouts from programs like Social Security get low enough, people will get angry. And they will start to learn the federal lexicon. By then, though, it will be almost impossible to reform entitlements or prevent high interest rates.
To get a head start, the best way is for Congress to make a New Year’s resolution: This session, we speak English.
(Amity Shlaes is a Bloomberg View columnist and the director of the Four Percent Growth Project at the Bush Institute. The opinions expressed are her own.)
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