Tax Policy Issues

Cut Taxes and Save Social Security

A big tax cut could help save Social Security and ensure future economic growth, says economist William Beach. Federal revenues are at record levels -- both in size and as a percentage of U.S. economic output -- and the Congressional Budget Office projects a budget surplus of $1.4 trillion over the next 10 years.

Thus there are revenues available to both reduce the tax burden and reform Social Security, says Beach. For instance, under alternatives proposed by the Heritage Foundation:

  • Five percentage points of the Social Security payroll tax could be diverted to personal savings accounts (PSAs) -- putting $1.9 trillion under the control of the workers who earned it, and providing capital for investment.

  • Furthermore, a package of tax cuts equaling $574.3 billion over 10 years could immediately eliminate the marriage penalty on working couples, reduce the top capital gains tax rate to 10 percent, repeal death taxes and make other tax reforms .

Income tax cuts that reduced penalties on work and savings would increase the rate of economic growth, says Beach, and PSA deposits would be offset with equivalent reductions in future Social Security benefits.

Source: William W. Beach, "How Congress Can Return the Surplus to Taxpayers: Three Approaches to Tax Cuts and Social Security Reform," Backgrounder No. 1219, September 9, 1998, Heritage Foundation, 214 Massachusetts Avenue N.E., Washington, D.C. 20002, (202) 546-4400.

For text http://www.heritage.org/Research/Taxes/BG1219.cfm

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