The payroll tax now provides a third of federal revenues. And, because it nominally funds Social Security and Medicare, some liberals regard its continuance as essential to the survival of those programs. That’s almost certainly wrong. Public pensions and medical care for the aged have become fixed, integral parts of American life. Their political support no longer depends on analogizing them to private insurance. Besides, the aging of the population, the collapse of defined-benefit private pensions, the volatility of 401(k)s, and pricey advances in medical technology mean that, no matter what efficiencies may be achieved, Social Security and Medicare will -- and should —- grow. Holding them hostage to ever-rising, job-killing payroll taxes is perverse.This is all true, to a point. But I think part of the reason Social Security and Medicare have been politically popular -- besides the innate appeal of these programs -- has been on the strength of the analogy to insurance. They are not welfare programs, which Americans have historically been cool to, but are part of a social compact between generations. Everyone contributes their fair share during their working years, and in return, everyone enjoys a measure of comfort in retirement based on what they contributed. That's the ideal, anyway; my understanding is that Social Security, at least, is mildly redistributive in its effects, even though it is funded by a regressive payroll tax.
Decoupling funding for Social Security and Medicare from a payroll tax and shifting to either general revenues or a dedicated carbon tax or whatever would require us, I think, to revisit this narrative. We could get rid of the insurance analogy, of course, but preserving a connection between the money we pay into the system and the benefits we get out of it is crucial -- not merely for the viability of Social Security and Medicare, but of all government programs, as Mark Schmitt argues in his column today. This is why I think rebating all or most of the revenue from a cap-and-trade schemes is the best, and perhaps only, way to do carbon emissions regulation in the US. You could structure it so that it would be functionally identical to dropping the payroll tax for a carbon tax, as Hertzberg proposes, but the connection between pricing dirty energy and rebates given back would be much stronger.