Now, as then, reducing payroll taxes will increase the federal budget deficit, because by definition, it’ll mean the Treasury will be taking in less money so it’ll need to borrow more.
That would only be true if the federal government wasn’t the monopoly issuer of the currency and if it actually “borrowed” money to fund spending, which it doesn’t/can’t. As the monopoly issuer of a sovereign fiat currency, the only way currency can be available to borrow (or collect as taxes) is if the government first creates it by deficit spending into the private sector. This means that Treasury bonds cannot be a funding mechanism for anything.
The original purpose of bonds was to allow Congress to maximize the gold reserve value in the economy. If it anticipated its tax “revenue” (an oxymoron) it could spend that in advance if it could entice investors to give up some liquid reserves (cash) for a set period of time in return for a small dividend. The investors pay a discount rate for the bonds which were not convertible to gold and received the full face value when the bonds matured.
Any US dollars entering the government sector (Treasury) from the private sector (Fed reserve accounts) is used to draw down the money supply by balancing with the debt, which was at that time any amount in excess of the gold reserve value. Now it is simply an aggregate of all deficit spending in our history that hasn’t been collected to pay a tax obligation. Dollars cannot pay down the debt and survive to “fund” anything, making “all” federal spending new money creation. Spending creates currency and taxation destroys the currency.
Bonds are a good safe investment for anyone who isn’t the currency issuer and needs no “funding” to spend on retirement benefits. The “surplus funds” of both Social Security and Medicare are only accounting entities to track individual payments, but they have no “money” to pay benefits from. If they did, Social Security and Medicare would not have needed budget appropriations to fund benefits all these years and become such an issue.
Yes, the withholding tax and dedicated bonds give beneficiaries a legal claim to their benefits, but no more than that. Those benefits must be paid for with new money creation, with or without the bonds. That is simply how bonds work. They are not, nor have ever been, a method of pre-funding benefits other than paying down the debt while the beneficiaries are earning money from their productivity. They are a form of inflation control only and are even more useless with a fiat currency Congress can create without restraint from revenue than they were with a gold reserve to defend.
I highly doubt that the Obama administration ever gave consideration to suspending payroll deductions permanently, as that would have eventually caused some of our more astute citizens to make the association with all taxes and do some deep diving into Fed and Treasury reports. Such an effort would have shown that no tax directly funds government spending, for the same reasons listed above. One cannot collect what doesn’t yet exist, so spending is always a first-order function with taxation and bonds following. Spending by the government “funds” both taxes and bonds, not the other way around.
Neither the withholding tax nor Medicare tax makes it any easier to fund either program and only impact the debt, which is a mostly meaningless record of dollars in circulation, not actual debt taxpayers will ever be on the hook for. We really should end the most regressive taxes ever levied on Americans and end the payroll deduction and Medicare tax permanently and just pay what is necessary to allow seniors to retire in dignity as every other modern nation manages to do quite well.
