The REGRESSIVE tax effects of defaulting on bonds held by SS Trust (but not Chinese bondholders):

[Faryn Balyncd]

What is the reason Simpson & his gang of thieves are so fond of saying "It's already been spent. Too bad!" with regard to the $2.5 trillion in Treasury bonds by the SS Trust Fund, but not with regard to the $4 trillion in Treasury bonds held by Chinese, Saudi & other foreign bondholders?

(The whole purpose of issuing the bonds was, of course, to borrow funds to spend, with repayment guaranteed by the full faith and credit of the United States.)

But the reason the RW wants to permanently default on the bond holdings of the SS Trust fund is so that the burden of non-SS government expenditures (including the deficits of wars, bailouts & corporate welfare) be paid by a REGRESSIVE payroll & self-employment tax rather than by a (mildly) progressive income tax.





The net effect of using payroll & self-employment taxes for general expenditures is a HIGHLY REGRESSIVE tax system:


This can be illustrated by the fact that the highest marginal tax rate if felt by a middle class American earning $106,800/year. This middle class American pays a marginal income tax rate of 28%, plus FICA tax of 12.4% (whether this is paid as a 12.4% self-employment tax, or as double 6.2% deductions from wages, the tax burden is identical) and Medicare tax of 2.9% on his/her entire income, for a total federal marginal tax rate of 43.3%.

Meanwhile, those in the supposedly top tax bracket (earning over $373,650/year in regular earned income) pay a marginal income tax rate of 35%, but have a 2.9% Medicare tax and zero% FICA tax on income over $106,000, thus yielding a total federal marginal tax rate of 37.9%.

(And at the same time, interestingly, an American trust fund baby with an income of $1,000,000/year consisting totally of long term capital gains pays a 15% capital gains tax, zero FICA tax, and beginning in 2013, a 3.8% Medicare tax, for a total federal marginal tax rate of 18.8%.)



The net effect of defaulting on the SS Trust fund bonds in order to permanently steal FICA tax revenue to pay general (non-SS) federal expenditures which rightfully should be paid from INCOME TAX revenues, is a tax system that is mildly progressive IN NAME ONLY, but is, in reality a REGRESSIVE tax system which extracts the greatest tax burden from the middle class in order to avoid taxing the top 1-2%.




That is the reality that these right wing propagandists are promoting when they promote the bogus line "It's already been spent. Too bad!" in regard to the $2.5 trillion in Treasury bonds held by the SS Trust fund (but never make that statement in regard to the $4 trillion in Treasury bonds held by Chinese, Saudi, and other foreign holders of U. S. bonds).


It was a huge mistake to appoint a committee stacked with those who advocate stealing FICA funds for purposes other than SS, falsely portraying the SS Trust Fund, the only federal program to have amassed a $2.5 trillion surplus,as holding "worthless IOU's". It was an even greater mistake to empower this biased commission with the properly Congressional authority to write legislation to gut SS and to force a vote WITHOUT AMENDMENT by the lame duck Congress. The House should immediately, before the November election, repeal the special rule passed in July preventing amendment by the House, and giving the Simpson/Bowles Commission an up-or-down, no-amendment vote.






:kick:

[dkf]

1. Oh yeah. Reagan and his crew are disgusting.

Thank goodness we all are beginning to see the big picture.

[leveymg]

2. Excellent analysis and policy prescription - you outa be in gov't!

I meant that as a sincere compliment. Do you really think, though, that the Catfood Commish is anything other than just another blind behind which Congress can duck and cover while it really succeeds at doing nothing but maintain the status quo? Is there really any other purpose behind this?

[femrap]

3. Great post ..... k and r

I want to bring the Eisenhower rates back!!!!

If the Boomers who have paid into this system their entire working lives don't get their SS, there will be blood in the streets.

Pitchforks 4 All!

[PatSeg]

4. How much wealth is enough for these people?

They evidently thought "Wall Street" was a how-to movie, not an expose.

Gordon Gekko: The richest one percent of this country owns half our country's wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. It's bullshit. You got ninety percent of the American public out there with little or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now you're not naive enough to think we're living in a democracy, are you buddy? It's the free market. And you're a part of it. You've got that killer instinct. Stick around pal, I've still got a lot to teach you.

[BeFree]

5. heh

So where are those who have been claiming SS is just fine?

The federal government is at least 6T dollars in the hole and 2.5T of that it owes to SS.

DC, we have a problem.

[bbgrunt]

6. k and r. very interesting.......they are very fond of having their cake and eating it too.

[tclambert]

38. They are trying to eat OUR cake.

[Moostache]

7. Thank you for putting the numbers to the real taxation story...

Want to make the structural deficits of the country go away in about 2 years?

Capital gains should be set to a sliding scale as well as income. Offer people 0% for the first $10,000 per year, 15% up to $100,000, 20% up to $150,000, 25% up to $200,000 and 40% over $200,000. The howling of "socialism" and "tax and spend" would be deafening...but the reality is that we have TRIED their way for 30 years and its left us in a very bad way.

FICA taxes should be held to the same level over $106,000 that they are AT $106,000 and the same for Medicare and Medicaid as well.

The addition of a financial transaction micro-tax - $0.001 per share per trade - would also make the treasury flush with money to actually spend on the welfare of the people of the country.

There would be universal health care with no concern for the costs.

There would be solvent Social Security for all Americans (and the retirement age would again be 65).

BTW...I hear all kinds of gnashing of teeth and beating of breasts about how when this retirement age was set the average lifespan was much less...and my response is : "SO FUCKING WHAT?!?!?!? ARE WE SUPPOSED TO JUST ACCEPT THAT WE CANNOT EVER MAKE LIFE BETTER?!?!?! IF WE CAN LIVE LONGER AND WORK LESS OF A PERCENTAGE OF THAT LIFESPAN, THEN WE HAVE MADE LIFE BETTER FOR ALL....THERE CAN BE NO MORE NOBLE ACCOMPLISHMENT, NO MORE WORTHY EXPENDITURE OF OUR TIME ON THIS PLANET THAN THAT!!!! THERE IS NO GREATER "FAMILY VALUE" THAN FREEING A MAN OR WOMAN TO SPEND MORE OF THEIR LIVES WITH THEIR FAMILIES AND LESS AT THEIR PLACE OF EMPLOY OR TRADE!!! Even the pathetic accumulation of material wealth pales in comparison to advancing the human species in any appreciable way. The richest man in the world is the one who has made the world a better place for those who come after him and by that measure, the Unites States is the poorest nation in the history of man...

There would be full employment in the nation - with government agencies that would be building the new 21st century infrastructure to replace the 20th century interstate highway system with high-speed rail criss-crossing the country, and other agencies like the Department of Energy actually developing 21st century domestic energy that is not summed up in pithy (and stupid) statements like "Drill Here, Drill Now".

This is NOT an intractable problem or an unsolvable situation...unfortunately, the founding fathers were dead on right about the American experiment...it can only work with an actively engaged and EDUCATED citizenry. We have neither today and the results speak volumes...

[Enthusiast]

24. Excellent post. nt

[SammyWinstonJack]

44. +1

:applause:

[pattmarty]

45. Excellent AND true rant.

[fascisthunter]

8. oh my....

[JDPriestly]

9. Thank you, Faryn Balyncd.

And, of course, you realize that while they are trying to steal our Social Security retirement funds with one hand, with the other they are forcing Americans out of their homes so that they (the big investors in hedge funds and banks) can steal our houses for low prices and then rent them back to us or sell them back to us basically making us all and our children into their indentured servants/slaves forever.

This is outrageous.

Thank you once again, Faryn Balyncd.

[Catherina]

10. Excellent. Thank you. Rec'd n/t

[Guy Whitey Corngood]

11. K & R

[Demeter]

12. It Was In Fact A "Strategic Default"

on an oath of office.

[ihavenobias]

13. # 29 n/t

[FairWinds]

14. "Worthless IOU's"

That's what Dubya declared when he visited the Social Security headquarters in WV while waving a stack of SS owned T-Bills. What he did not point out was that he himself was continuing to purchase T-bills while president. So yeah, he totally counts on "full faith and credit" for HIS treasury notes, and those of the Chinese, Japanese, Canadians, etc. as well. But Bush knows, as do Alan Simpson and that whole thieving crowd, that if they EVER even whispered that T-notes in general were "worthless" the dollar would instantly sink to a value of zero. Why are some T-notes worthless, but not others? Why are some government debts to be repaid, but not others? We all know the answers . .

[customerserviceguy]

39. The specialized securities

that the Social Security HQ holds are not negotiable on the open market. The kind of T-bills and notes that investors (including the Chinese buy) can be bought and sold, this happens every day.

Also, the Chinese can just redeem their Treasury securities and not buy more (roll them over) the Social Security Trust Fund has zero choices in that matter. There is a difference.

[20score]

15. A big K&R

[indepat]

16. Have made these/similar remarks dozens of times on this board without ever once, to my recollection,

eliciting the first comment. Glad someone much more eloquent/amenable has brought this crucial issue of tax inequality to the fore-front. :patriot:

[Lasher]

17. Keep it comin' Faryn!

You speak nothing but truth.

Glad to see you now have a donor star.

Lasher

[defendandprotect]

18. Anyone actually saying they will DEFAULT on securities accruing to Social Security???

[molly77]

20. Al Gore took a lot of flack

for saying he would put SS in a lock box. Guess he was smarter than we thought.Brilliant post. I'd like to see it go viral.Remember when bush started privatizing SS talk? It got a more negative response than the Iraq war . Guess WE just don't know WE can't trust this administration any more than the last one.

[defendandprotect]

30. Agree overall... however, lock box won't work because of "national security" issues ....

There's always a catch!

One way or another, they'll get into it -- they're like raccoons with a garbage can

full of goodies!!

Social Security was never intended to run a surplus of more than a month's funds --

it's intended to be a "pay-as-you-go" system -- *

Surplus funds were run up to under scam of providing extra funds 20 years ago for

baby boomers retiring -- but actually as a SLUSH FUND for elites!

They substantially increased FICA payments on poor and middle class to pay for it!



* and certainly not to be in the general budget where the SS surplus offsets the

horrendous/horrific MIC budget!!

[Yupster]

35. The lockbox meant nothing

It was nonsense.

The fact is that the social security payments are an obligation of the congress. Congress sets the bendpoint foimula and it will change it at leisure to pay out whatever it thinks it can.

Congress would do this if there were bonds in a lockbox, or if there aren't any bonds in a lockbox.

The lockbox is truly meaningless.

Congress will pauout whatever it feels it can payout.

[Faryn Balyncd]

21. They don't use the term, because they want to de-legitimize these bond obligations. They want

...to place this $2.5 trillion in accumulated surpluses, invested in Treasury bonds, in a different psychological category than the $4 trillion Treasury bonds held by Chinese, Saudi, and other foreign bondholders, and than the Treasury bonds held in domestic private portfolios. So they refer to them using terms such as "worthless IOU's", rather than Treasury bonds backed by the full faith and credit of the United States, in order to de-legitimize the obligation of the Treasury to redeem these bonds, and to de-legitimize the SS benefits for which Americans have paid. They want to weasel out of redeeming the bonds, and consequently the SS beneficiaries who created the surplus with their contributions, so they don't use terms that correctly describe the financial obligations and what actions they propose (terms like "bonds" and "default", preferring instead terms which de-legitimize and belittle the legal obligations & the rightful expectations.)

By stating (in the case of only those bonds held by the SS Trust Fund, but not the bonds held by other investors) that "The money has been spent. Too bad!", they are essentially saying that the burden of non-SS expenditures which have been paid for by borrowing from the SS Trust Fund should be PERMANENTLY borne by the SS Trust Fund, and NEVER BE RE-PAID. They are saying that the SS Trust Fund should reduce benefits rather than redeem the bonds. That these bonds should NEVER BE REDEEMED to the Trust Fund. They are advocating the SS Trust Fund (unlike all other bondholders) treat the bonds like "worthless IOU's", and never redeem them to meet benefit obligations.

And the Right Wing wants to do this rather than raise the funds to repay these bond obligations, because that would require raising revenue by requiring that the top 1-2% of taxpayers perhaps pay, horror of horrors, MIDDLE CLASS TAX RATES, instead of continuing to be the beneficiaries of total federal tax rates much lower than a middle class taxpayer earning the top FICA taxable income of $106,600.

Thanks for your comment.





:hi:





:kick:

[defendandprotect]

31. Either all Treasury Securities are "worthless IOU's" or they're all redeemable--!!

[Yupster]

36. I don't think that's right

Just as an example, let's say you save $ 100 a month in your sock drawer as a new car fund. You also save $ 25 a month in your underwear drawer as a repair fund. Your car fund gets up to $ 3,200 when your refrigerator goes out.

You take $ 1,000 from your sock drawer and put a note in your drawer saying repair fund owes car fund $ 1,000.

You also owe $ 62,000 on your mortgage.

_____________________________________________________________________________

Now three years later you look in your sock drawer, see the note and just crumple it up and throw it in the trash.

______________________________________________________________________________

Does your bank care?

Has your mortgage been effected?

Has your mortgage become worthless?

Of course not. There's a big difference between owing money to yourself and owing it to someone else.

If we crumple up the social security trust fund tomorrow, China will not care and neither will any other bondholder, any more than your neighbor will care if you crumple up the note in your sock drawer.

[sabrina 1]

37. I don't agree. If the U.S. government defaulted on

its own people, it would make its other creditors very nervous.



Your neighbor would not care about your drawers UNLESS the neighbor had also lent you money. If the neighbor saw you crumpling up IOUs to your own family, they would become very nervous about getting THEIR money back because they would realize that you cannot be trusted to be responsible about debts even to your own family. And they definitely would not be lending you any more money.

There is no way the Federal Government can default on the SS bonds.

They have decided there are two ways to pay off the debt, the way they see it. (there really aren't two ways in a sane world but we're talking about people like Alan Simpson.)

1) Use the Government's own assets to pay it off, which means raising taxes on their wealthy buddies, amongst other options. Or ...

2) Make the American people pay off their own debt which will increase the money in the Trust Fund, giving them even more money they can dip in to for their wars and for Wall St. bailouts etc. Because no matter how big the Trust Fund grows, they will never increase the benefits of the people who own that fund.

#2 is such a ridiculous proposal that it should not even see the light of day. But when you let the foxes into the henhouse, as Obama did when he formed this Commission and invited foxes like Alan Simpson in he should have known that #2, ludicrous though it is, would be the means by which they would attempt to get out of paying off the debt. And he should have expected the same lies we have heard from them for decades.

Assuming he was naive and did not realize this, he certainly does now and he has only option, which is to disband this Commission and/or change the rule, as the OP says, that would allow them to sneak their recommendations into Congress after the November election for an up-or-down vote. If he doesn't do this, then we can safely assume he knew what he was doing from the beginning.

[Yupster]

48. They wouldn't default

They would just fold social security into the general budget and since you can't owe money to yourself, the trustfund's assets would cancel out the treasury bond's debt and the bonds would magically disappear.

It wouldn't mean anything. Congress would still pay out what the formula they set says to payout.

You see the bonds are meaningless.

[Faryn Balyncd]

40. China won't care, but the FEET (who put that money in the sock drawer) will be PISSED!

(and it's not a good idea to abuse your feet.)

[Yupster]

46. The feets won't care either

Don't you see?

The amount that gets paid out gets paid out because congreess sets a bendpoints formula. If congress says we should honor the current formula for another 20 years, then they will do it.

It doesn't make any difference whether the money comes from general budget revenues or treasury bonds or a secret special lockbox. Congress is going to pay out whatever it wants to pay out. It's all government money anyway whether its tax money, borrowed money, or social security money.

As far as the feet are concerned?

They just want the money. Where it comes from will be immaterial to them.

[Faryn Balyncd]

49. The reality is that Simpson et al don't want the feet to get the socks they paid for, but want to...

....spend the money on silk hose for the richest, most politically connected 1-2% who DIDN'T pay for it, and who are aghast at the idea of paying MIDDLE CLASS tax rates.



:hi:



:kick:

[defendandprotect]

52. Your arguement is based on what China will think if SS redeems its Treasury securities?

Social Security FICA is paid by 320 million Americans -- and more over a half century --

and by employers. This isn't moving money from one pocket to another.

Let's be clear that elites have gotten into the "sock drawer" and used the money as a

slush fund for elite interests--!

[Warren Stupidity]

23. no they want to cut benefits and raise even more revenue from

increased FICA taxes and some of us here keep cheering them on. All to avoid paying off the FICA surplus bonds the right way, by raising income taxes on the wealthy.

[defendandprotect]

32. Problem is that right now "they" includes Obama . . . THAT's the major problem we have --!!!

[pleah]

19. K&R

[Warren Stupidity]

22. Restore multiple brackets and progressivity to the income tax

RIGHT FUCKING NOW!

Enough of the rightwing bullshit of increasing FICA taxes and cutting benefits. Add more brackets and raise the cash from the wealthy via the progressive income tax.

[Enthusiast]

25. K&R

I can't see this issue any other way than that expressed by the OP.

[raouldukelives]

26. k&r nt

[slipslidingaway]

27. knr nt

[Jim Sagle]

28. None of it was a mistake. They intend to impoverish us all.

[Turborama]

29. K&R n/t

[pa28]

33. Absolutely. Un-needed cuts to put SS in perpetual surplus is a back door default.

A regressive one at that as further borrowing can be used to subsidize tax cuts for the top bracket.

Benefit cuts or FICA withholding increases are pretty much a given result of this commission from what's already on the record. Unfortunately, SS cuts might be only the opening act of this commission's regressive freak show. Trial balloons are floating around right now for a VAT tax and the elimination of tax credits and deductions which primarily benefit lower and middle income filers.

Simpson has already discredited himself and by extension his commission. None of his assumptions about SS hold up under scrutiny and the issue is too important to rubber stamp. The Democratic party and the President himself will become infamous with their own constituency if they choose to just go along.

[Timbuk3]

34. Wow! I think even a teabagger could understand this!

Great explanation. Thanks!

Ummm...

The subject line is too optimistic, isn't it?

If facts were nails and we all had hammers, we couldn't get one into a teabagger's head.

But I meant the part about the great explanation! Kicked, recommended, and bookmarked.

[florida08]

41. thank you Faryn Balynced and Sabrina

for your hard work in bringing the truth about SS. It's so important that we fight for our seniors and ourselves.

From the Trust FAQ website

In the past, the trust funds have held marketable Treasury securities, which are available to the general public. Unlike marketable securities, special issues can be redeemed at any time at face value. Marketable securities are subject to the forces of the open market and may suffer a loss, or enjoy a gain, if sold before maturity. Investment in special issues gives the trust funds the same flexibility as holding cash.

Money to cover expenditures (mainly benefit payments) from the trust funds comes from the redemption or sale of securities held by the trust funds. When "special-issue" securities are redeemed, interest is paid. In fact, the principal amount of special issues redeemed, plus the corresponding interest, is just enough to cover an expenditure.

The amount bought in 2009 was $1,049 billion, while the amount sold was $950 billion

Far from being "worthless IOUs," the investments held by the trust funds are backed by the full faith and credit of the U. S. Government. The government has always repaid Social Security, with interest. The special-issue securities are, therefore, just as safe as U.S. Savings Bonds or other financial instruments of the Federal government.

Many options are being considered to restore long-range trust fund solvency. These options are being considered now, over 25 years in advance of the year the funds are likely to be exhausted. It is thus likely that legislation will be enacted to restore long-term solvency, making it unlikely that the trust funds' securities will need to be redeemed on a large scale prior to maturity....

The assets of the larger trust fund (OASI), from which retirement benefits are paid, were nearly depleted in 1982. No beneficiary was shortchanged because the Congress enacted temporary emergency legislation that permitted borrowing from other Federal trust funds and then later enacted legislation to strengthen OASI Trust Fund financing. The borrowed amounts were repaid with interest within 4 years.

http://www.ssa.gov/OACT/ProgData/fundFAQ.html

Don't believe the hype being generated by the right. Sometimes I believe their thinking is if they destroy SS they'll accomplished destroying the democratic party

[Time for change]

42. Excellent explanation

Too bad that our presumabley "free press" doesn't discuss this.

The fact that Obama appointed Simpson to his position on the commission is inexcusable IMO for a Democratic President.

[xchrom]

43. Recommend

[drm604]

47. Did I miss something?

Has someone been talking about defaulting on the bonds? :shrug: (I'm not being snide. This is honestly the first I've heard of this. Scary if true.)

[florida08]

50. the more I read this the madder I get

we who have paid and continue to pay into SS through FICA have been financing tax cuts for people who don't pay a damn dime into it.

[florida08]

51. The IMF Wants the U.S. Government to Default on the Bonds Held by Social Security

http://tpmcafe.talkingpointsmemo.com/2010/07/09/the_imf_wants_the_us_government_to_default_on_the/