Democrats Fail in Attempt to Seize Tax Issue

April 28, 1991|By PETER OSTERLUND

WASHINGTON — Washington.--In the final weeks of 1989, as winter blew into the nation's capital and official Washington hunkered down for the holidays, Sen. Daniel Patrick Moynihan faced a few cameras and a couple of forlorn reporters and dropped a bombshell.

The New York Democrat promised tax relief for the middle class and a more honest accounting of the federal government's budget deficit. But his promise -- some called it a threat -- went much further than that. Senator Moynihan's prescription was for a cut in the social security payroll tax, a notion crafted to shatter a winking conspiracy among the nation's leaders and, thus, end the government's habit of bankrolling its debt with the social security trust fund.

In the Coke-and-Pepsi-like struggle between the nation's two major political parties, this was explosive stuff, the kind of idea that could turn the tables on the tax debate and, just maybe, enable the Democrats to win back some of those middle-class votes the party lost to Ronald Reagan. Alas, it was not meant to be. After the plan was buried last week in a 60-38 Senate landslide, Democrats scrambled anew for gimmicks to win back those voters and propel one of their own into the White House.

"I'd say we're right back where we started," said Senator Moynihan, shortly after the defeat of his plan.

Democrats should be so lucky. The Moynihan plan's virtues were also its underdoing, given the political tripwires surrounding Social Security. The cruel political reality is that it may have left Democrats more vulnerable to Republican attacks than before Mr. Moynihan and his staff concocted the idea.

Some party strategists knew they were in trouble when partisans like Rep. Newt Gingrich, R-Ga., gleefully handed out buttons that read "Save Social Security: Vote Republican."

The irony was that Mr. Gingrich and his conservative cohorts once advocated a wholesale overhaul of Social Security. Now, sensing that the public would oppose any attempt to disturb the status quo, they stood foursquare in defense of this New Deal pillar.

By the time the American Association of Retired Persons came out against the Moynihan plan, Democrats knew the idea spelled disaster. George Bush had warned them not to "mess with Social Security." Sen. Phil Gramm, R-Texas, vowed to make sure the public understood how "careless" Democrats were ready to be about Social Security's future. Sighs one Democratic aide: "Moynihan turned out to be a grenade without a pin."

Mr. Moynihan's scheme was a child of frustration -- born of resentment with continued, and successful, Republican attacks on Democrats as "tax-and-spend" liberals, reared on the party's larger ambitions for the Oval Office.

It was also inevitable. For nearly a decade, the Social Security Trust Fund had been piling up annual surpluses of tens of billions of dollars -- about $70 billion this year alone -- and investing those surpluses in Treasury bonds, government IOUs with which the United States underwrites its deficits.

The idea was to preserve Social Security for the Baby Boomers, who will begin to retire in record numbers after the beginning of the next century. Social Security had been founded on a "pay-as-you-go" basis, with current workers' payroll taxes going to pay current retirees' benefits. But an increase in life-expectancies and a decrease in birthrates led analysts in the late 1970s to project that Social Security would run out of money unless Congress either raised the payroll tax to usurious levels or established a trust fund with which to pay future benefits. In 1983, a blue-ribbon commission recommended the latter course, and the rest is history.

The problem, as many would-be reformers saw it, was that the annual Social Security surpluses were being used to enable the government to spend money on things other than Social Security. Since the surpluses were invested in Treasury Bonds, the government was able to borrow money that, otherwise, it would have had to earn the hard way -- by raising other kinds of taxes.

By using the Social Security payroll tax, they contended, the government was taking the easy -- and unfair -- way out. At present, the payroll tax stands at 6.2 percent, paid both by employers and employees on the first $53,400 of income. Thus, individuals with incomes over that threshold surrender a smaller percentage of their incomes to Social Security than those with lower incomes.

That scheme makes sense within the narrow confines of the Social Security program: Those with lower incomes receive proportionately greater benefits than those with higher incomes. But as a method of raising general revenues, the payroll tax flies in the face of the central tenet of U.S. taxation: Those who make more should pay more.

Enter Senator Moynihan. The Senator proposed cutting the 6.2 percent tax to 5.2 percent, while raising the income threshold to $82,200.

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