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Take a Guess: Who's Going to Pay for the Terror Economy?

BY ROBERT B. REICH
The Los Angeles Times (October 23, 2001)
<http://www.latimes.com/>

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Not since World War II have Americans felt so unified. We're fighting a war against terrorism and we're fighting to get the economy moving again. And we're all in this together. Except when it comes to paying the bill.

The cost of the war on terrorism since Sept. 11 is estimated to be $40 billion, just for this year. That includes at least $20 billion for the military; $7 billion for recovery and relief in New York and at the Pentagon; $3 billion to fight bioterrorism; $2 billion for more security at dams, power plants and federal buildings; and $600 million to secure our airports and aircraft.

That's a lot but still less than 1% of our annual national product. To get the economy moving again, the federal government will have to part with a lot more. Ideally, the government would put that added money into the hands of middle-and lower-income people. Not only are they the most at risk of losing their jobs but they're also much more likely to spend additional cash. High-income people already spend all the money they want to. The House Ways and Means Committee has proposed $100 billion in tax cuts over the next year to spur the economy. Problem is, these cuts are mostly for the rich. All of the $54 billion in accelerated tax cuts would go to the top 30% of taxpayers. Half would go to the top 5%. Eighty percent of the benefits from the proposed capital gains tax cuts would go to the richest 2% of households.

So who's going to pay? Middle-and lower-income Americans. Eighty percent of Americans now pay more in payroll taxes than they do in income taxes. The House Ways and Means bill doesn't cut payroll taxes, even temporarily. To the contrary, it would increase the odds that payroll taxes would have to be hiked.

Here's why: With all the extra spending and tax cutting, the federal budget will go into the red next year.

That itself is no cause for worry. A budget deficit is perfectly fine when the economy is shrinking, as it almost certainly is now. Consumers and businesses aren't spending enough to keep the economy running near full capacity, so the federal government spends more and taxes less.

Unfortunately, the House's tax bill retains most of its cuts beyond next year, even after the economy is likely to turn up again. That spells trouble because government is going to need a lot more money starting in a decade, when the 79 million baby boomers begin collecting Social Security.

What to do? One possibility would be to raise the Social Security retirement age. It's already 67 for some people; it could even go to 70. But this wouldn't be fair to lower-income people, many of whom will have spent 45 years in hard physical work. Another possibility would be to slash Social Security payments. But this wouldn't be fair to boomers who paid payroll taxes on the assumption that they could count on Social Security.

The most likely solution would be to hike payroll taxes. Odds are that this is what the president's Social Security commission will recommend. That way, the federal budget would go back to a surplus, allowing the federal debt to drop. By the time the boomers' Social Security comes due, the government could borrow the money to pay them.

The payroll taxes paid by today's workers are more than sufficient to cover the cost of today's Social Security because the boomers are still working. So where is the extra going? To finance the war against terrorism and--if the House Ways and Means Committee has its way--a big tax cut going mostly to the rich.

Get it? Income and capital gains tax cuts for the rich now, payroll tax hikes on middle-and lower-income Americans to come.

Americans like to think we're all in this together. But if the tax bill now emerging in the House becomes law, the richest of us will be excused.

Robert B. Reich, a former secretary of Labor, is a professor of economic and social policy at Brandeis University and the author of "The Future of Success" (Knopf, 2001)

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