THE BLOG
10/14/2013 02:49 pm ET Updated Jan 23, 2014

Break the Budget Impasse - A Tax Cut that Raises Revenue

House Republicans have said they just want a "little something" from the Democrats in order to sign a clean debt limit bill. They want some kind of spending cuts to help them save face. Well, how about a tax cut - a tax cut that will also be a stimulus helping to restore jobs and raise revenue?

Most of us agree that consumer demand is a major sticking point to growing our economy. Corporations have more than enough money to expand production of goods and services, but there aren't enough people out there able to buy their products.

In particular, those Americans with the least amount of money now have even less money to spend. Years of steadily declining wages and now, as a result of the financial crisis, loss of interest income, and for some, their homes and jobs, have led the descent into belt-tightening just to pay the bills. This contributes to a sluggish economy on the one hand, and a lessening of tax revenue on the other.

The Republicans' answer seems to be trim the national budget by taking more away from those on entitlements. The Democrats point out that this will reduce the amount of spending American citizens do.

What if we could increase the spending by workers who collect entitlements?

I'm talking about those currently on Social Security. Up until about 30 years ago, retired workers who collected Social Security did not have to pay any taxes on this income.

After all, the IRS already taxed this money once when it was earned. Why should Americans who live long enough have to pay double taxes on their Social Security?

History of taxation of Social Security earnings

The Social Security Act was signed by FDR on 8/14/35. Taxes were collected for the first time in January 1937 and the first one-time, lump-sum payments were made that same month. Regular ongoing monthly benefits started in January 1940.

The taxation of Social Security earnings began in 1984 following bi-partisan passage by Congress of a set of Amendments in 1983, which were signed into law by President Reagan in April 1983.

In 1993, legislation was enacted which had the effect of increasing the tax put in place under the 1983 law. The OBRA Act, signed by President Clinton, raised from 50% to 85% the portion of Social Security benefits subject to taxation; but the increased percentage only applied to "higher income".

Beneficiaries of modest incomes might still be subject to the 50% rate, or to no taxation at all, depending on their overall taxable income, Currently, federal tax on Social Security benefits starts at a total income of more than $25,000 for individuals or $32,000 for married couples.

Why eliminate tax on Social Security earnings?

Taxing Social Security benefits is a roundabout way of taking back part of the Social Security earnings from taxes paid by American workers (and employers) into the Social Security fund, and transferring the monies into the general fund for the federal government to spend.

Removing the tax on Social Security earnings of retirees would automatically raise the incomes of those who are on Social Security, i.e., the workers who had 40 quarters of qualifying earnings during their lifetimes. The maximum limit on earnings that can qualify for Social Security benefits is $113,700 for 2013. There are no benefits paid on earned income above this amount.

That may sound like a high income to accrue benefits from, but American workers receive only a fraction of their earnings when they retire. The Social Security Administration reported this month that the average Social Security benefit for a retired worker was about $1,230 a month at the beginning of 2012.

$1,230 a month works out to $14,760 per year. While those living only on Social Security will not pay tax on that low of a benefit, many other retirees have additional income from pensions, 401Ks, traditional IRAs, or paid employment after the age of 66. Those retirees will wind up paying Social Security tax as well as tax on their other income(s).

Previously many seniors made use of Treasury bills, CDs and bank accounts as a means to supplement their incomes. The financial crisis wiped out many of these kinds of sources of interest earnings. This is why retirees would most likely spend the money they gain from not paying tax on Social Security benefits. This spending would help to jumpstart our sluggish economy.

No taxes on Social Security benefits would mean more jobs for younger workers and hence, more income tax monies for federal, state, and local government coffers.

Most importantly, no more taxes on Social Security earnings would give Republicans a tax cut to vote for; for Democrats it would put more money in the pockets of seniors without raising taxes, and for all of us it would provide a new source of private spending to speed up our economic recovery.