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NON-CONTRIBUTORY TAXATION WITHIN THE SEMI-CONTRIBUTORY SYSTEM. - The present so-called contributory system, consisting of the employer's and employees' taxes and the benefits paid without a means test, is financed in part by what are in essence non-contributory taxes.

This statement is self-evident if the employers' half of the payroll tax is considered to be not a true contributory tax (whether it should be so considered is a matter discussed in a later section). Under this assumption, the truly contributory tax payments most, at the most, only half the cost of the benefits.

If the employers' tax is considered a true contributory tax, the general statement above about non-contributory taxes still holds. Even if the contributory system as a whole promised to be self-supporting (as already noted, this appears not to be the case), it would still be true that part of the payments to some individuals under that system would be unearned payments to those with low earning power, those staying in the system only a short time, those whose earnings come in the later years of life, and those entering before the payroll taxes go up. The counterpart of this free element, so far as the whole system is self-supporting, is the excessive (on a rough actuarial basis) tax paid by the others in the contributory system. The excessive tax is in each case as truly a non-contributory tax, from the individual point of view, as, say, the estate tax. In general terms, A pays in order to finance part of B's old-age benefit.

"EXTENSION OF COVERAGE" ALSO POSSIBLY EQUIVALENT TO INCREASE IN GENERAL REVENUES DEVOTED TO OLD-AGE PAYMENTS. - The ratio of the non-contributory element to the contributory element within the semi-contributory system may conceivably grow as the system is extended, since those now not covered by the system are in large part low-income individuals--farm laborers and domestic servants particularly, and, perhaps to a somewhat less extent, farmers and small shopkeepers, etc. Most of then would therefore fall far short of contributing an actuarial equivalent of the benefits they would get. This statement holds, as explained above, even if the employers' part of the payroll tax is considered "contributory."

On the other hand, many of these "non-covered" individuals are in fact a drain on the general revenues now, because they work during a minor part of their lives in covered employments and get the fruits of the lower, high-return and of the benefit formula. To put these persons under the semi-contributory system for all of their lives would be to strengthen the contributory element in the system and thus relieve the strain on general revenues.

Moreover, there would be a decrease in the drain on general tax revenues as the Federal-state old-age assistance payments and relief payments declined.

Whether the factors described in the last two paragraphs would completely offset the increase in the non-contributory element noted in the third paragraph above is a statistical and actuarial problem of some magnitude, and the present writer can only say that he sees no a priori grounds for one conclusion or the other. It is worth noting, however, that there is at least a possibility that "extension of coverage" will mean an increase in the dollars of general tax revenue levied for old-age.

It is even conceivable that an individual newly covered would be in fact contributing less toward his old-age payment than when he was under the means-test assistance plan, since the indirect weight, on him, of the taxes levied to meet his assistance payments might have been more than the contributory taxes he would now be called on to pay plus his share of the new general tax revenues necessary. This possibility, however, while worth some consideration, is probably pretty remote in almost all instances.

THREE-WAY TAX SYSTEM: EUROPEAN VERSUS UNITED STATES METHODS. - The present old-age system in the United States resembles the old-age systems in Europe in that the system is financed from three sources, each source playing an important role: contributory payroll taxes on employees; payroll taxes on employers (contributory or not, depending on how one defines "contributory"): and other revenues, called here "general revenues."

Unlike the European systems, however, the general-revenue share in the United States system is usually employed, not to supplement the other two shares for any given individual, /12/ but to be the whole, or almost whole, support of an individual who has been not at all, or but slightly, under the payroll-tax part of the system. There are, however, important exceptions to this statement: as noted above, the benefits received under the payroll-tax part of the system will be so low for so many years after 1942, and will always be so low in many cases of married couples, that the individuals in question will, if they were needy before receiving benefits, presumably be drawing assistance payments from the general-revenue part of the system, even though receiving benefits.

Again, unlike the European systems, the general-revenue part is not uniformly coordinated, geographically, with the payroll-tax part. It depends largely on decisions by each of the several States.

II. TAX IMPLICATIONS OF THE RESERVES PROBLEM

The discussion of the old-age reserves problem will first be cast in abstract form by analyzing the four extreme combinations of the reserves and contributory ideas. The goal is to discover to what extent, if at all, the reserves problem is necessarily bound up with the contributory problem, or other features of an old-age system as such - and the extent to which the reserves problem, which in popular discussion is associated with the old-age program, has any necessary connection with that program as distinguished from any other part of the government's activities or from the general budget question.

In a later section, an attempt will be made to apply the findings of the abstract discussion to the old-age system as it exists in the United States.

Effects Judged by Comparison

A word of elementary warning as to the technique of analysis seems advisable here.

In the following analysis the effects of any particular measure will as usual be described by comparing the situation with what it would have been without the measure in question. Thus a measure may "reduce" the public debt over a certain period by $50 billions even though the debt grows from, may $40 billions to $60 billions over that period: the only necessary assumption then is that, without the measure in question, the growth would have been from $40 billions to $110 billions. Similarly, old-age tax revenues may be said to be "invested in" certain public works only if those public works would not have been undertaken had the old-age revenues not been available. /13/ If the public works would have been undertaken anyway (and other expenditures too would have been the same), the effect of the old-age revenues must be either to reduce the debt or to increase the cash balance, as the case may be.

The "measure" whose effects are analyzed in the study is the entire system of old-age payments plus tax measures, if any, taken in conjunction with the program for payments. In other words, it is assumed that if the tax measures under examination (or other measures to take their place) were not enacted, no old-age payments would be made. Thus a discussion of the effects of imposing a given volume of new taxes to cover the payments will be a comparison with the situation as it would be if there were no such taxes and no such payments.

A comparison could instead be made by assuming that a fixed amount of old-age payments, no more and no less, would be made regardless of the tax measures under examination. Under this hypothesis the amount of old-age payments would be entirely independent of these tax measures. Thus a discussion of the effects of imposing a given volume of new taxes to cover the payments would be a comparison with the situation as it would be if there were no such taxes, but the payments remained.

Also, a comparison could instead be made by assuming that a minimum amount of old-age payments would be made regardless of the tax measures under examination, but that payments above this amount might or might not be made, depending on the tax measures taken. Here, a discussion of the effects of imposing a given volume of new taxes to cover the payments would be a comparison with the situation as it would be if there were no now taxes but part of the payments remained. To illustrate, it might be assumed that, with no old-age system at all, the budget is balanced; an old-age system of this third-comparison type now appears; the minimum old-age payment that will be made is $300,000,000; however, $500,000,000 will be paid if the current tax revenues are increased $200,000,000; current tax revenues are in fact increased by $700,000,000 (while payments are kept at $500,000,000) in order to build up a reserve by reducing the debt outstanding in the hands of the public. Under these conditions it could be said that the effect of the $700,000,000 tax increase, compared with no increase at all, is a decrease in the publicly-held debt of $500,000,000, for if there were no such tax at all, the debt would increase by $500,000,000, and with such a tax it instead decreases $200,000,000 ($700,000,000 - $500,000,000).

However, for purposes of the present discussion it appears not important to put the comparison on either of the last two bases; the treatment of the reserves problem, especially, would became cast in unfamiliar and probably confusing terms.

Other Assumptions

It is assumed in this discussion that the old-age system will endure indefinitely: hence no problems connected with the termination of the system are considered. It is also assumed, in order to get a convenient stopping point in the analysis, that the yearly annuity payments finally stabilize.

Four Extreme Types

As noted above, the analysis at this point deals with the four extreme combinations of the reserves idea and the contributory idea.

PLAN I. RESERVE: /14/ CONTRIBUTORY. - This plan will first be described without assuming the use of a formal "fund" mechanism whereby the reserve is given a distinct legal status.

Under this plan the amount collected each year in general taxes remains unchanged. The contributory tax collections are devoted to retiring the debt. The interest on the debt, and hence the total of general expenditures, declines each year as the debt is decreased. The resulting surplus of general tax revenue over general expenditures is used, like the contributory tax revenue, to reduce the debt. Then the annual annuity payments start, they at first absorb only part of the year's contributory tax revenue, leaving the rest available to continue debt retirement. Finally they get so large that in some one year the only amount left to retire the debt is the surplus of general tax revenues over general expenditures. The next year (and more so in succeeding years) even part of this surplus is used up to pay annuities, and finally the situation stabilizes with annuity payments such year equalling the sum of (1) the year's contributory-tax revenue and (2) the year's surplus of general tax revenues over general expenditures. Items (1) and (3) such remain constant thereafter, and of course debt reduction ceases.

The description above can be in terms of an old-age "fund" that invests, in the Government's own obligations, both the proceeds of the contributory taxes and the surplus of general tax revenues over general expenditures. This surplus in this case does not appear as such, but takes the form of interest payments on the Government's own bonds held in the fund. Thus the fund uses the first contributory-tax proceeds to buy Government bonds, then next year buys more bonds with (1) the second contributory-tax installment and (2) the interest on the first bonds, and so on. The situation stabilizes where the interest payments to the fund on the bonds it holds, plus the proceeds of the contributory taxes, are just enough to cover the year's annuity payments.

In either description of Plan I, the "reserve" is simply the difference between the publicly-held debt-as-it-would-be and the publicly-held debt-as-it-would-have-been. The term "fund" is somewhat misleading; it conjures up pictures of piles of gold, or currency, or physical wealth of some kind. Actually, no such piling up need be contemplated. Anyone who, having bought up his own I. O. U.'s. puts them away in his safe deposit box instead of destroying them, does not thereby change his financial condition. What he may be doing--and what the Government seems to be doing in this case--is, reminding himself that he has come particularly heavy annual expenditures coming in later years. If he will so plan his general expenditures and general receipts that he will have enough yearly surplus, in later years, to pay out a sum equivalent to an annual interest charge on these piled-up "reminders" (his own I. O. U's), he may avoid a sudden strain on his finances that might be embarrassing.

Whether or not the "fund" mechanism is used, it is important to recall that if no excess of old-age taxes over annuity payments were forthcoming in early years, the entire tax load (old-age taxes plus all other taxes) would climb very sharply in later years. By means of the excess, the entire tax load is made heavier in the early years in order to avoid no sharp a jump in later years. Thus the "reserve" plan, from the point of view of a Government concerned over the amount of tax revenue that it must ask for, may become essentially a means of averaging out the entire tax load over the years.

The "reserve" may consist of something other than the Government's own bonds. The contributory tax collections might, for example, be used to build certain public works that would not otherwise be built. These works may be "self-liquidating" in the same that they earn a money income sufficient to meet that part of the interest charge that the Government is undergoing because it did not use the tax money to retire a part of the publicly-held debt. In this case the reserve still fulfills the function of averaging the tax revenue over a period of years.

Suppose, however, that the reserves money is used in such a may that the aggregate of tax revenues needed in later years is not reduced, but the taxpayers of those later years find it no harder to pay this larger amount than they would have found it to pay the smaller amount in the absence of old-age taxes? Such a result could be reached by investing the old-age tax money in projects that, though not technically self-liquidating, might, if wisely planned, serve to increase the disposable income of the country in future years. This result might follow even if the money were spent for something other than public works (again, something that would not otherwise have been undertaken). In general: whether the economic power seized by the new "reserves" taxes is turned book to private hands (debt retirement) or is used by the government, the economic aspects of the reserves idea is fulfilled only if the amount is invested /15/ rather than consumed for current purposes. Otherwise, it becomes no easier for taxpayers to meet the demands upon them in later years when full annuity payments are under way than it would have been without any reserves plan.

If, to pose a highly unlikely case, the erstwhile holders of the retired government debt spent the proceeds on song and dance, the strain on the tax mechanism in 1980 would presumably be as great as if no debt retirement took place. (Of course there may be some argument whether the gay times of 1938 should not in that case to considered to offset the strain of 1980:) An even greater failure of the reserves plan may occur if the erstwhile debt holders' money remains idle over a long period. In all this, however, one must consider that the "debt retirement" in question is very likely to be not an absolute retirement, but a slowing down of increase in debt. For the present study, it will be assumed that debt retirement under an old-age reserve plan does, by and large, result in correspondingly increased interest-earning investment.

These economic aspects are not however necessarily controlling. The fact that, after all, the non-self-liquidating aspect of the investment may have made it no harder to pay the greater total of tax revenue (greater than would have been necessary if the investment had been pouring money directly into the Treasury) may not be self-evident to the taxpayer, and the political repercussions of his dissatisfaction may be serious. If the investment has actually increased private taxable income (instead of public income) it is still true that the tax rates have to be, on the average, higher than they would have been if the investment had been self-liquidating: /16/ also, the greater total of tax revenue demanded may still cause political trouble.

If the benefits of the non-self-liquidating investment took the form of something other than an increase in taxable income, the political aspects would become still more disturbing. Arguments that the still higher tax rates that would then be needed would really be no harder to bear, in view of certain benefits coming from the investments, would be in danger of not gaining such *** . Finally, if the benefits (or the dollar income, for that matter) went to others than those who were called on for the added tax money, a conflict of interests would arise, and the system would or would not be a reserve plan, in a narrow individual-interest ***, depending on which interest one had at heart.

PLAN II. NO RESERVE: CONTRIBUTORY. - Under this plan the contributory taxes are maintained just as in Plan I. As in that plan, the first proceeds of the contributory taxes are used entirely to retire the Government's own bonds. This reduction of the debt is at once nullified, however, by the *** to the public of an equivalent amount of bonds, which in turn allows an equal reduction of the general taxes (any tax except the contributory taxes). More directly stated, the contributory tax revenue replaces part of the general tax revenue for general expenditures. Thus, until the annuity payments start, the general taxes are lower each year (than they would be if the old-age system did not exist) by the amount of the contributory tax revenue for that year. There is, under this plan, no surplus of general tax revenue over general expenditures as in Plan I.

When the annuity payments start, they are financed from the current contributory tax revenue, only part of which, consequently, is available to permit reduction of the general taxes. At some point this reduction becomes less than the year before, and thereafter it diminishes until finally the annuity payments take all of the current contributory tax revenue, and general taxes are back to their "normal" level. /17/ But the annuity payments continue to grow; thus general taxes must be increased above their normal level. The situation finally stabilizes with general taxes somewhat above their normal level. /18/ In effect, the general taxpayer in this way has to make up for the respite he gained in earlier years.

The contributory taxes are in this plan at the same rates in the same years as under Plan I; indeed, being strictly contributory, they are fixed, not by whether or not there is to be a reserve, but by the earnings and ages of the annuitants, present and prospective. It may be said that a no-reserve plan would require so high a contributory tax when 1980 appeared that it would be politically impracticable--a 10 per cent payroll tax, for instance, in place of the prospective 6 per cent. But such a statement assumes that the reduction of general taxes that is made possible by the contributory-tax revenues in the early years is counterbalanced, in later years, not by an increase in general taxes but by an increase in contributory taxes that puts the latter above the "contributory" level, if "contributory" is taken in the sense that each individual, through the tax on him, provides for his own annuity on an actuarial basis. /19/

In the more fundamental economic sense of a reserve plan, discussed above, this Plan II may or may not result in the building up of reserves, depending on the use that the taxpayers make of the reduction in general tax revenue. If they invest the tax saving, and if the contributory tax revenue is not taken out of investment, this plan II is, as plan I likewise might be, a reserve plan in the economic sense.

PLAN III. RESERVE: NON-CONTRIBUTORY. - Under this plan the general taxes would be at once increased by an amount equal to what would have been collected from contributory taxes under a contributory system. This extra general-tax revenue is used to reduce the debt, and is assisted in this process by the general-tax revenue that in freed by the reduction of the interest charge (as in Plan I). When the annuity payments start, they as first absorb only part of the year's extra general-tax revenue, but after some years they get so large that in some one year the only amount left to retire the debt is the surplus of normal general-tax revenue over general expenditures. Finally the situation stabilizes with annuity payments equalling the sum of (a) the extra general-tax revenue plus (b) the surplus of normal general-tax revenue over general expenditures. Increased taxation of the general-tax payer in the early years has obviated a still heavier increase in the later years--the first principle of the reserve idea.

As has been indicated above, if the erstwhile debt holders invest less of the money (in good investments) than would the taxpayers the money came from, the effort that must be exerted by the community as a whole in the later years in order to meet the old-age payments is not lessened. Even in this case, however, the political pressure that varies with the size of the tax revenue would be lessened.

As in Plan I, the description can be in terms of a "fund", but in the present plan the contributory tax revenue is replaced by extra general-tax revenue.

PLAN IV. NO RESERVE: NON-CONTRIBUTORY. - Under this plan the general-tax system remains unchanged until annuity payments start. Thenceforth the general taxes are increased to keep pace with the increase in annuity payments. By the time the annuity payments stabilize, the general-tax revenues are on a higher level than under Plan III. There is no change in the debt throughout. No contributory taxes are levied.

This is the only one of the four plans that cannot result, intentionally or unintentionally, in the creation of a reserve in the economic sense above.

IMPLICIT ASSUMPTIONS. - The creation of a reserve fund (in the tax-reserve sense, not the general economic sense) in Plans I and III, and the linking of the contributory feature to the non-reserve feature (Plans II) assume that the planned use of added taxes (Plans I and III) or replacement taxes (Plan II) is not abandoned through pressure of political and other forces. These forces are apt to be especially powerful when the taxes in Plans I and III are to be used to reduce the publicly-held debt, without a formal "fund" mechanism, for then a budget surplus, technically, appears. If indeed the pressure results in expenditures of an investment nature that might well have been planned as an integral part of plan I or III, one may say that those plans are still being carried out - the objectives are being reached, but not by quite the same route that had originally been laid down. But if the pressure results in consumption expenditures - whether general expenditures or added old-age payments /20/ - or if it results in technically non-self-liquidating investments, then the plan must be said to have failed.

In plan II it is assumed that the reduction in general taxes is not immediately followed by effective pressure for more consumption expenditures or non-self-liquidating expenditures that would be financed by cancelling the general-tax reduction.

Plan I, if it fails as indicated in the second preceding paragraph, changes, in effect, from "Reserve; Contributory"; to "No Reserve; Increased, Non-Reserve Creating, Expenditures; Contributory", and may be called Plan A. There is another may in which Plan I is likely to fail, however: the contributory tax revenue may tempt the legislators, not to increase expenditures, but to reduce general taxes. Thus Plan I lapses into Plan II ("No Reserve; Contributory").

Plan II itself, however, may lapse into Plan A; the general-tax reduction may be followed by increased expenditures, with cancellation of the reduction. Thus it is possible that the political pressures will be so great that a contributory system can only be obtained by *** an increase in expenditures - and an increase of a kind that does not build up a reserve in the tax-reserve sense.

The increase in expenditures may of course take the form of an immediate increase in the level of old-age payments. In effect, the general budget is left as it was before, no reserve is built up, and the contributory-tax money is paid out at once in old-age benefits. The result is, in the earlier years, a non-contributory, non-reserve system (Plan IV) and, in later years, a semi-contributory system, still with no reserve.

Plan III - "Reserve, Non-Contributory" - may, under political pressure, less its reserve feature either by a repeal of the new general taxes (in this case it lapses into Plan IV) or by a diversion of the new general tax revenue either to increased expenditures of a non-reserve type (Plan A) or to increased old-age pensions (Plan IV on a higher level).

In summary, Plans I and III, and even Plan II, may be said to represent a politically unstable equilibrium compared to Plan IV and Plan A.

Those who wish to lessen the present amount of inflation (defined here simply as a yearly excess of governmental payments to the public over governmental receipts from the public) /21/ in the next few years and who also fever the contributory device, will be attracted by plan I. If they prefer not to use the contributory device, Plan III will do. Likewise, those who are concerned with the possibility that the tax system would undergo undue strain in the later years will favor Plan I or Plan III, depending on what they think of the contributory feature.

Those who desire inflation in the next few years are not dependent on the assumptions about political pressures discussed above in their choice of the best plan. Plans II and IV will be their choice, depending on whether they want a contributory or a non-contributory system. If, under Plan II, the general-tax reduction is indeed followed by renewed expenditures and a cancellation of the tax reduction (thus converting it into Plan A) the absolute amount of inflation is not affected. Plan IV is not affected at all by the pressures in question.

Present System in United States

Any given system may, of course, and in practice probably will, be a mixture of the extreme types described above.

In classifying the system in use in the United States, it seems desirable to consider "the system" as consisting of a combination of (a) the old-age assistance payments, with the amount and kind of taxes collected to pay them (these taxes are those that would net have been levied if there had been no old-age payments to make) /22/, plus (b) the benefits and lump-sum payments under the contributory system, with the payroll taxes. The chief reason for considering these two parts as one is that substantial changes made in one are almost sure to result in substantial changes in the other.

The United States old-age system, thus defined, is a mixture that is scheduled to change over time.

CONTRIBUTORY ASPECTS. - At present, and for several years even beyond 1942 (when benefit payments start), the system will be wholly or largely a non-contributory system. True, payroll taxes are being paid meanwhile, so that one might be inclined to say that only on the payments side is the system non-contributory during this period. But it must be recalled that;

a) One-half the payroll tax (the employers' tax) may be considered no true contributory tax, at least at present rates (the present writer inclines to this view);

b) Assuming that the philosophy of the present system is that the rates of the employers' tax and employees' tax go up and down together, one-half of the unearned element in the system that results from the weighting in favor of the low earners may be allocated to the employees' tax; thus even this tax is not wholly contributory from the individual taxpayer's point of view;

c) The rates will be so low for some time yet that even if a) and b) above are disregarded, the payroll tax side of the present situation does not represent a wholly contributory system;

d) The old-age assistance payments are, so far as tax revenue is concerned, being net by general revenues; and to the extent that they are being net instead by borrowing, there is no indication that the debt (or the interest thereon) in to be paid by other than general revenues.

e) The 3 per cent rate paid on reserve funds is somewhat more than the Government saves by having its publicly-held debt reduced; this difference must be net out of general tax revenues or borrowing. /23/

Thus even on the tax side the present system is and will be for some time largely non-contributory.

Several decades later, according to the present program, the system will have become much more contributory.

RESERVES ASPECTS. - At present, the system as a whole is somewhat on the reserves side. The benefits part of the system is indeed on a reserves basic, but the Federal share of the assistance program is probably on a deficit basic. This statement is highly conjectural; it means that, in the writer's opinion, the Federal Government's tax revenue is not greater than it would have been if it had entered into no old-age assistance program -- or at least, not greater by an amount corresponding to the payments being made. However, the prospects of any increase in tax revenues for this purpose are not very strong. In still other words, the Federal Government is probably borrowing all or most of the money for its old-age assistance payments. It is of course dangerous to try to allocate any given Governmental expenditures to borrowed revenues as against tax revenues, but there is some historical basic for doing so in this case.

Similarly, there is at least a good chance that the difference between the 3 per cent on reserve obligations and the market rate of interest, discussed above, is being not by borrowing rather then taxation.

The states seem to be meeting their share of current assistance payments by imposing new taxes or raising rates, but they are not building up reserves for future assistance payments.

Considering only the benefit system it may be doubted, for reasons given in an earlier section, that the reserve will ever exceed $25 billions or so (this is a very rough estimate), and once it has reached this peak it will start downward and eventually disappear, unless rescued by large enough payments from general revenues. Including the assistance system, then, it may be doubted whether the real reserve for the system as a whole will even approach $35 billions at the maximum.

"Reserve" Problem a General-Budget Problem

The analysis above leads to the conclusion that the "reserve" problem in the tax-reserve sense is a general-budget problem. /24/ In other words, the present writer's view is that his conclusion as to whether an old-age reserve should be built up does not depend on whether he favors a contributory system: moreover, his conclusion on reserves is subject to change depending on changes in the budget situation as a whole. At the present time, for example, he tends to favor a reserve plan, because of what he fears will be unfavorable consequences of the current and prospective rapid growth in the public debt (publicly held). If conditions such as those of the middle and late 1930's obtained, on the contrary, and seemed likely to obtain for a long time to come (public debt retirement and tax reduction proceeding at a such faster pace than planned) /25/, his conclusion would probably be against a reserve plan.

The more important corollaries of this attitude are:

1) Whether the old-age system is to be made contributory or non-contributory or partly one and partly the other has no necessary connection with the reserve problem, aside from undesired political repercussions.

2) The reserve problem is in its political and Governmental aspects a problem, first, of how much debt increase or debt retirement (debt outstanding in the hands of the public), if either, or how much self-liquidating investment /26/ shall be accomplished in a given period; and second, of whether a larger aggregate of tax revenue shall be raised now in order that a smaller (than otherwise) aggregate may be raised later.

3) The reserve problem in its national economic aspect is a problem,

first, of the extent to which the community as a whole shall be asked to save (and invest) in order that it may in later years meet, with less effort (than otherwise) at that time, the payments it is scheduled to make at that time through the channels of Government:

and second, to what extent the various reserves or even non-reserves mechanisms can be counted on to bring about the saving and investing desired.

III. WHAT IS A "CONTRIBUTORY" TAX?

The remainder of this report discusses the reasons for contributory taxes and the various possible types of such taxes.

A contributory tax was defined above as "A sacrifice, through taxation, made by a person who is supposed to derive a direct benefit that does not go to others who do not undergo the sacrifice." This definition may be taken simply as a provisional one, and it purposely begs the questions, now opened for examination, of who it is that benefits and why he rather than some one also should pay. In general, the questions may be expanded to ask; why should old-age payments be made from the proceeds of any particular kind of tax? Special attention will be given to the payroll taxes.

Individual-Sacrifice Principle

One argument that bears on the type of tax to be used in financing an old-age payment program is essentially an ethical one. In its most general form it says that the beneficiaries as a group, should defray the cost of the payments in greater proportion than they would if the payments were simply financed out of general revenues. In a more covers form it says that the beneficiaries, as a group, should pay the entire cost of the payments. In a still more covers form it says that each beneficiary should meet the actuarial cost of his own payment.

The argument does not proceed on the grounds that if the beneficiary does not pay for his own benefit some undesirable results will follow - e.g., an undue proportion of the nation's resources will be devoted to caring for the aged. This type of argument is considered in another section below. The present argument is that to give any individual an old-age benefit without asking him to defray a special share of its cost is simply unfair.

EMPHASIS ON WHO IS NOT TO PAY. - Another approach to the argument in the most general form above emphasizes that, whoever is to defray the cost of the payments, there are certain groups that should not be asked to pay at all, or at least not more than a relatively small part. Those groups are those that, chiefly for administrative reasons, are not covered by the particular payments in question, but are probably just as much in need of them as the covered groups. Thus the uncovered share-cropper would be asked to pay little or nothing toward the old-age benefit of the covered factory worker; but the uncovered landlord of considerable means might be asked to pay an appreciable amount. This approach is particularly relevant when considering what kind of support, if any, should come to the old-age benefit plan from general revenues.

The individual-sacrifice argument, it may be said by way of anticipating, is in either of its forms no answer to the problem of the indigent aged, except as it implicitly denies the existence of that problem. Specifically, it does not consider the question; should not the well-to-do in the uncovered groups be willing to contribute somewhat to the benefit payments going to those in the covered groups, in view of the fact that, if there were no benefit system, these well-to-do would presumably have to help finance assistance payments to at least some in the now-covered groups? Similarly the individual-sacrifice argument does not consider the question: how can contributions toward their own old-age benefits be obtained from people who have such a low economic value that they may not even live to reach old age if they have to restrict consumption in order to make contributions?

 
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