According to recent news reports, President Bush has suggested that he is open to the idea of busting the cap on the payroll tax if it will grease the wheels for Social Security reform. Two words: Bad idea.
Currently, the payroll tax –12.4% of wages — is levied on only the first $90,000 of wages. By busting the tax cap, you would, in effect, raise taxes 12.4% on every dollar of income over $90,000. Senator Lindsey Graham has been one of the most enthusiastic backers of this idea, introducing a Social Security reform bill in November 2003 that would bust the cap. Last week, Bush seemed willing to follow his lead, saying that he would not bar the idea.
First, let’s dispel a myth about busting the tax cap, encapsulated in a recent Molly Ivins column:
There is no crisis in the Social Security program. It is not in trouble. If nothing is done, come 2042 — or 2052 if you believe the Congressional Budget Office — SS will have to start paying less than its promised benefits, but will still be able to pay seniors more than it does today in constant dollars. You can easily fix even that minor problem by lifting the cap on FICA taxes now at $90,000.
Of course, you should put no credence in anything Ms. Ivins writes, including “and’ and “the,” and the above quote is no exception. The Social Security actuaries looked at this question over a year ago. They examined two scenarios; the only one worth considering is scenario two, which lifts the cap on all income but adds no new costs to Social Security. Even under that scenario, Social Security begins paying out more in benefits than it collects in payroll taxes beginning in 2025. In other words, Social Security begins tapping the trust fund in that year, which means the taxpayers will have to pony up additional dollars.
To be fair, Bush and Graham are not interested in busting the cap to fund Social Security as it presently exists, but to help fund the transition to a system of personal accounts. Regardless of the motivation, however, it is still a stinker. First, the idea is a bad economically. The tax will hit a lot of small businesses, which are the job-creation engine of our economy. Although there are no exact statistics on how many small business owners make over $90,000 annually (but the Census Bureau does break small businesses down by race and gender — thanks guys!), it is possible to get a rough idea based on a 2003 report by the Joint Economic Committee that examined the tax returns of different types of businesses, including S Corporations and sole proprietorships. Not only are these two types of businesses the fastest growing in the U.S., they are also often small businesses. Although the report does not list income distribution, it does report receipts for these business in 2000. For that year, over 1.1 million S Corporations and over 700,000 sole proprietorships had receipts in excess of $250,000. If even half of the owners of those businesses make more than $90,000, then busting the tax cap will have serious wealth-destroying effects.
Busting the tax cap is also a loser politically for the GOP. Both Bush and Graham should take a long, hard look at small-business owners’ political leanings. According to a U.S. Chamber of Commerce survey from last September, 77% of small-business owners said they intended to vote for President Bush. 66% said they were registered Republicans, while 85% said they were either conservative or moderate-to-conservative. Does the GOP really want to bust the tax cap on those folks? Social Security reform already has enough opposition without raising the ire of small-business owners, not to mention the Chamber of Commerce and the National Federation of Independent Businesses.
Finally, there is the issue of fairness. Many of the people who would be affected by busting the tax cap would get nothing in return. As free-market economist Peter Ferrara states, “People in their fifties who are earning six-figure salaries won’t be eligible for a personal account, but will have to pay a much higher tax in their peak earning years.” Add to that the fact that the over-fifty crowd has high rates of voter participation, and busting the tax cap on them is a political loser in addition to being unfair.
Fortunately, the President’s openness to busting the tax cap has landed with a thud in some important parts of Capitol Hill. Speaker Dennis Hastert criticized because it “would take more money away from people.” Majority Leader Tom DeLay was even more adamant. “This Republican House didn’t come here to raise taxes. We can solve this problem without raising taxes,” he said. Perhaps it was in anticipation of such reaction that White House spokesman Trent Duffy said of the President’s remarks, “Just because he said it was an option doesn’t mean he embraced it.”
The President could do no better than to simply jettison it altogether.
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