Ronald Reagan and Social Security Taxes

Email Print
FacebookTwitterShare

Conservatives revere Ronald Reagan almost as much as they revere (but rarely follow) the Constitution. Some libertarians are fond of Reagan as well, pointing to the famous photo of him reading The Freeman.

I don’t share their enthusiasm.

There are many things I could say about Reagan: criminal, economic and foreign interventionist, drug warrior, deficit-spender, debt increaser, expander of government and government power. He only looks good when he is standing alongside of Republican presidents like George W. Bush.

For the complete and utter evisceration of Reagan, see Murray Rothbard’s “The Reagan Phenomenon,” “Ronald Reagan, Warmonger,” and “Ronald Reagan: An Autopsy.”

I just want to briefly focus on taxes, Social Security taxes. As part of the “American Tax Relief Act of 2012″ recently passed by the lame-duck Congress to avert the “fiscal cliff,” the temporary two percent reduction in the Social Security tax rate that was in effect for two years was allowed to expire. This means that the taxes of every working American just went up, even the 50 percent or so who pay nothing in federal income tax.

Sounds just like what happened under Reagan.

But I thought Reagan was a great tax cutter? True, but he was also a great tax raiser.

Reagan presided over large, necessary, and beneficial reductions in federal income tax rates. For this we can praise him. But he also presided over three destructive tax increases related to Social Security.

The original Security tax rate in 1937 was 2 percent on the first $3,000 of income. Then, as now, employers and employees each paid half. The rate had doubled by 1954, and doubled again by 1969, sometimes increasing every year. By 1990, the rate was up to 12.4 percent (where it stands today) on a “contribution and benefit base” of $51,300 (now up to $113,700).

Reagan shares in the blame for this.

I have criticized Reagan in several articles (e.g., here and here) because the Social Security tax rate rose from 10.7 percent when he took office in 1981 to 12.12 percent when he left in 1989. To be fair to Reagan, that is not exactly true. Although the rate was 10.7 percent when he took office and 12.12 percent when he left, he was not responsible for raising it from 10.7 percent but he was responsible for raising it above 12.12 percent after he left office. Let me explain.

The 1977 amendments to the Social Security Act advanced the scheduled increases in the Social Security tax rate. For 1979-80, the rate increased to 10.16 percent, for 1981, the rate increased to 10.7 percent, and for 1982-1984, the rate increased to 10.8, or at least it was supposed to. The 1983 amendments to the Social Security Act – signed into law by Reagan in April of 1983 – increased the rate for 1984 to 11.4 percent, and kept it there until 1987. For 1988-89, the rate increased to 12.12 percent. The 1983 amendments – which Reagan signed – also mandated that the rate increase to 12.4 percent beginning in 1990. So Reagan was responsible for raising the rate from 10.8 percent to 12.4 percent – a 14.81 percent increase. That is actually more of an increase than I was criticizing him for (13.27%). In fact, it is a larger increase than the recent increase in the top income tax rate (10%) that Obama wanted and got from the Congress. But also, could the automatic Social Security tax increases scheduled to take effect in 1981 and 1982-1984 have been stopped? Of course they could have. Just like Congress must vote every year to stop a congressional pay raise from taking place.

The Social Security “contribution and benefit base” was $29,700 when Reagan took office and $48,000 when he left. Does he share in the blame for this? From 1937 to 1971, Congress increased the wage base on an ad-hoc basis from $3,000 to $7,800. The 1972 Social Security amendments increased the wage base to $9,000 in 1972, $10,800 in 1973, and $12,000 (further raised by legislation to $13,200) in 1974. Subsequent increases were to be indexed to changes in the national average wage index. However, the 1977 amendments not only increased the Social Security tax rates, they also raised the wage base to $22,900 in 1979, $25,900 in 1980, and $29,700 in 1981. Since then the increases have been due to automatic wage indexing. Could these automatic Social Security tax increases have been stopped? Of course they could have. Just like Congress must vote every year to stop a congressional pay raise from taking place.

It was also under Reagan and the 1983 Social Security amendments that Social Security benefits began to be taxed. So even though income tax rates didn’t go up, some people on Social Security paid more in income tax because their Social Security benefits were now counted as income. Up to 50 percent of Social Security benefits were taxable. That figure is now up to 85 percent.

How ironic that Social Security taxes were raised under Reagan and lowered under Obama. How ironic indeed.

Email Print
FacebookTwitterShare
  • LRC Blog

  • LRC Podcasts