The Magazine

Read My Lips: The Sequel?

From the March 7, 2005 issue: Bush opens the door to a big tax increase.

Mar 7, 2005, Vol. 10, No. 23 • By STEPHEN MOORE
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Raising the payroll cap would convert Social Security into an overt income redistribution program. Higher income people would pay an inordinate amount of payroll tax in order to subsidize the pensions of low income workers. If Social Security is to be made into a welfare program, then it should be done on an honest and much less economically destructive basis simply by cutting the benefits of wealthy seniors, rather than hiking marginal tax rates while they are still working, which destroy economic incentives to work and invest.

It may seem fair to raise payroll taxes on higher income workers. But in many high-cost states, an income of between $90,000 and $150,000 a year is anything but rich. In states like California and New York, many school teachers, computer technicians, construction contractors, and medical assistants earn more than $90,000 a year, especially if they log overtime.

The rich already do pay the lion's share of federal taxes through the personal income tax. The latest Tax Foundation data reveal that the wealthiest 10 percent of earners already pay almost two-thirds of the income tax. And because we have an Earned Income Tax Credit that essentially refunds to low-income families the money they pay in payroll taxes, even the payroll tax system is much more progressive than is commonly understood.

The suggested payroll tax hike is politically perverse, given that its principal impact would be to cancel out one of George W. Bush's primary policy victories in his first term, namely, the income tax cuts. Bush went to the mattresses to reduce income tax rates by about 5 percentage points on average. This, in combination with the capital gains and dividend tax cuts, helped spur growth, a stock market rally, and now a jobs boom. But for those in the upper middle income range, lifting the payroll tax would transform a 5 percentage point reduction in tax rates into a net 7 percent hike.

The strongest selling point of a personal account system for Social Security is that the current system is a rotten deal for young workers. For workers with incomes of more than $90,000 a year, the program already offers a poor return on the money they pay in to Social Security. The typical worker with earnings of more than $90,000 gets a rate of return from Social Security that is around 1 percent. Raising the payroll tax cap tells these workers that they would now get an even tinier rate of return, because they would be forced to pay more in for the same promised payout. Republicans should be arguing for a better deal for all workers.

George W. Bush is desperate to secure at least token Democratic party support for his historic Social Security modernization plan. He wants Social Security reform--and especially the implementation of personal accounts--to be the crown jewel of his domestic policy legacy. But any reform bill that raises taxes to win the support of Ted Kennedy or Nancy Pelosi likely will be much worse than no bill at all.

Stephen Moore is president of the Free Enterprise Fund.