Home > Main > Why Payroll Taxes support Massive Military Spending.

Why Payroll Taxes support Massive Military Spending.

August 22, 2011

More support for the contention “The Traders Crucible has the best comments section on the web.”

From Clonal Antibody.

“I have also come to the conclusion that the current method of funding Social Security and Medicare is inadvertently responsible for the high US spending on National Security, and therefore responsible for the US foreign adventures! Let me know if you need me to clarify!”

Here’s the nutshell argument:

“The only government segments large enough to absorb the necessary deficit spending are SS, Medicare, Defense and Homeland Security. Since SS and Medicare are funded through an entirely separate federal tax, the necessary deficit spending must happen in defense and homeland security. This level of deficit spending is what the market “demands” for growth, so it happens.”

More from CA:

“If we look at the FY ’12 spending pie, we find that

The main items of govt spending are (highest first)

1) Defense 25%
2) Healthcare 23% (primarily Medicare and medicaid)
3) Pension 22% (primarily Social Security)
4) Welfare 12% (primarily Food Stamps, unemployment and SSI)
5) Interest 6%
6) Education 3%
7) Transportation 3%

These items together account for 94% for the Federal Budget

Healthcare and Social Security account for 45% of Federal outlays. These are always paid for by a dedicated tax, that produces surplus revenues. So these items can never account for the Federal Deficit. The deficit has to be produced from other spending.

As per MMT accounting, the deficit is necessary to fund net private savings and interest.

In the pie above interest accounts for 6% – but this is only the interest paid on government issued Tsy’s.

What are these so called savings? We have previously discussed that interest on bank loans has to come from GDP growth, and in the absence of enough growth, it has to come from the government deficit.

Private credit creation, and charging of interest on it, of necessity require economic growth. This would not be the case with public banking. A “no growth” sustainable economy is only feasible with interest payments going to the government – (Another topic for another day!)

Going back to the deficit – the deficit has to come from a spending area other than those items covered by the “covered” expenses. This leaves defence and homeland security as the major items with which to create a deficit!

We could theoretically cut defence spending by eliminating the SS and Medicare taxes. I believe that the negative effects on the economy will be balanced out by the stimulative effects of the payroll tax cut!”


[Update: Viewed through this model, the U.S. Military becomes a gigantic make work program that focuses on extremely violent work.]

All this comes from thinking about the economy through the lens of accounting, and taking the accounting seriously.  If you don’t spend to grow the economy, you’ll need to focus lots of spending on destroying stuff.

Don’t assume G – T out of existence for the IS/LM model, and clear thoughts develop.     Don’t assume no demand for “net financial assets” and you get clear thinking about what happens in our world.

[Update #2:  It appears that even this spending is being eyed for cuts.  We’re doomed.

Categories: Main Tags: , ,
  1. beowulf
    August 22, 2011 at 2:11 pm

    Military Keynesianism…

    It is what it is. I blame progressives for not aggressively adding desired govt spending through the Pentagon. For example, funnel infrastructure spending through the Army Corps of Engineers or, say, offer employers and individuals a tax credit to buy into the Pentagon’s Tricare single payer system (pays civilian docs Medicare rates and uses VA drug pricing, administered via three regional contractors).

    • Clonal Antibody
      August 22, 2011 at 2:45 pm


      It does account for the fact that every President, no matter what their pre-election promises, seems to end up spending more on defense, and engaging in foreign adventures. Could also be a reason why BO (I am no fan of his!) chose to put SS on the table during negotiations.

      This leads me to wonder – what Kucinich would have done had he been in BO’s place. Keep in mind that Kucinich’s economic adviser was Michael Hudson!

      • TC
        August 23, 2011 at 9:18 am

        It’s the only spending everyone agrees on. Spending more on defense is good for communities, and crazy people like to kill rather than build.

        • August 23, 2011 at 9:31 am

          And do not forget TC, that when the US Military takes out targets with weapons systems developed by MIC (Mil Industrial Complex), it nearly always guarantees two things
          1) there’s a fresh opportunity to build new things (new targets, for future conflicts, ie infrastructure, albeit in foreign countries)
          2) more recruits for the eternal conflict known formerly as the ‘war on terror’, which helps to perpetuate more MIC spending, more targeting, and more destruction/building.

          I concur completely with beowulf that progressives have fallen down on the job repeatedly by not channeling social program initiatives through the Pentagon. Massive opportunities squandered.

        • TC
          August 23, 2011 at 9:53 am


          It’s self perpetuating.

          There’s the destroying part and the “rebuilding” part – which really means fat government contracts on both sides.

          I am surprised there isn’t aren’t more people applying the “broken windows fallacy” to the MIC.

          Much of this spending benefits the honor culture of the south as well. It would have vanished long ago from starvation except for vast government spending propping it up.

    • TC
      August 23, 2011 at 9:38 am

      The point that clonal makes is that without the payroll tax, it’s totally clear we go off the rails because we spend so little as a % of GDP.

      But with the payroll tax, the only big sector left is Defense.

      I am thinking the high inflation of the 1970’s was partially

  2. August 23, 2011 at 9:27 pm

    I get what you’re saying, but this doesn’t strike me as the most profund insight. Basically saying that money is fungible. And I’m not sure what the causal mechanism being implied, is.


    Unlike Social Security, Medicare is is not (nearly) fully covered by a dedicated tax; it’s subsidized via “General Revenue Transfers” from the government.


    Medicaid is totally from the general fund.

  1. August 26, 2011 at 4:12 pm
Comments are closed.
%d bloggers like this: