Problem is if you give him the 5% tax rate difference (about 35,000$ for him) its not going anywhere except into a bank account. He won't spend it, and won't even invest it anywhere.

I think the one that just slays me is "the government borrowed money from the Trust Fund, and THEY SPENT IT!  Whatever will the government do when the Trust Fund wants/needs to redeem some of the Treasury obligations it's holding???"

Reading through the thread, look at how many attempts have been made to explain how all of this works, and look at the ongoing effort to keep making it something it isn't in order to fit a faulty construct.

Consider this example.  Imagine you want to go to college and you need to save in a college fund to pay for it.  You currently work a 9 to 5 job but decide to moonlight as a bartender and use that money for college.  All the income you make in your 9 to 5 job goes to your checking account that you use as your general fund to pay for all your expenses.  You then create a separate college fund at a different bank.  All the money you make as a bartender goes into that account.  After say ten years when you are ready to start college, you have $100K in your college fund.  Let's assume for convenience 4 years of college will cost the same - $100K.  I think you and I would agree as long as the $100K cash is in the college fund, you have college covered.  That fund has real economic value.

But let's make another assumption.  Let's instead assume you kept transferring funds out of your college account to your checking account at the other bank and used that money to pay for general expenses.  It was all spent.  Along the way, you wrote IOUs and put them into your college fund promising to pay that money back from your checking account.  You don't worry that the college fund can be replenished because you have plenty of borrowing capacity (credit cards with a high credit limit and a low balance as well as a house you own with plenty of equity that can be monetized).  When it comes time to go to college, and the $100K of expenses are due, what happens?  Your college fund has no money - only $100K worth of IOUs.  What BTD was essentially arguing is that since the college fund is a separate account with its own funding source, has run surpluses, and has IOUs against an account that has the capacity to honor the commitments, it will not add to your debt.  But I think we would both agree you actually have a $100K problem.  Those IOUs have no real economic value.  To honor those IOUs and pay for college, you have to come up with $100K that you currently do not have and already spent.  That means either work more hours to increase income (raise taxes), lower your expenditures and use the savings to pay for college (cut spending), or you borrow $100K against your credit cards and/or house increasing your debt (borrowing from China).

The SS trust fund is different.  Whatever assets we have in that account is offset by credits in the general fund.  These two funds send money back and forth the way the treasury department at a large company sends money back and forth among divisions.

Krugman wrote this about the GOP response to the health care bill:

This is just like the attempt to wave away Medicare savings, and it's equally nonsensical. Social Security and Medicare do have dedicated funding sources, but they are also part of the overall federal budget. Put it this way: if you took the current GOP line, it wouldn't matter how much Medicare costs -- it's all off-budget, so who cares?

He also said this:

4. Social Security taxes -- I think they mean Medicare, but anyway, additional tax revenue does reduce the deficit, regardless of what trust fund it's allocated to.