Taxes and Social Security
By Arnold Kling
Laurence J. Kotlikoff proposes to replace the payroll tax with a sales tax.
replacing the payroll tax with a sales tax is the same as (a) eliminating the payroll tax ceiling, (b) taxing wealth at the payroll tax rate, and (c) taking advantage of the expanded tax base to lower the payroll tax rate.
Next, Kotlikoff would stop accruing Social Security benefits. That is, workers would be entitled to the benefits that they have earned based on their taxes paid to date, but going forward they would use private accounts. Those accounts would work like this:
All account balances are invested in a single, global, market-weighted index fund, providing all workers the same fully diversified portfolio and rate of return. The government fully guarantees the downside; workers can only gain from investing in the market. At retirement, balances in this Personal Security System are gradually sold off and converted to inflation-indexed pensions. The Social Security Administration handles all paperwork, investing and pension conversions. Wall Street plays no role and collects no fees.
For Discussion. What would be the economic affect of Kotlikoff’s plan?