Will Bush's legacy be a huge new burden on the most productive Americans?
Wednesday, December 27, 2006 12:01 a.m. EST
When these columns warned last month against a tax increase next year to "save" Social Security, White House officials said we were hooting at phantoms. Well, the more we listen to senior Republicans, the more worried we get.
Asked about a tax increase last week, President Bush refused to rule it out the way he had after the 2004 election. Instead, he said that, while he'd prefer not to raise taxes, in negotiating with Democrats he wants everyone's "ideas on the table." His spokesman, Tony Snow, was just as noncommittal on taxes, saying that "I'm not ruling it up and I'm not ruling it down." More than one GOP Senator has told us privately he's open to the idea. And no less a political student than Bill Thomas, the soon-to-retire Chairman of House Ways and Means, recently told a public forum that "I wish I were a bit more comfortable in listening to some of the noises that are currently being made" by his GOP colleagues. Uh, oh.
The issue is the price Mr. Bush is willing to pay to attract Democrats into a Social Security deal he could claim as a legacy. The President deserves credit for trying to reform Social Security while it is still in temporary surplus. But Democrats refuse to talk about personal retirement accounts for younger workers, and the White House is already signaling surrender on that proposal. The big question left is whether having everything "on the table" means conceding to Democratic demands for higher taxes today in return for future benefit cuts.
What liberals dearly want is to raise the payroll tax cap. Under current law, Americans pay a 12.4% Social Security tax on all wages up to $94,200 in 2006, and the cap rises each year with inflation. (There is also an uncapped 2.9% Medicare payroll tax on top of that.) So why not lift the cap a little more, say the taxers, perhaps to $150,000 if the trade-off is benefit cuts that will prevent even larger tax increases in the future?
One answer is that Social Security was always meant to be run like a pension program where the taxes paid by workers are linked to the benefits they get back during retirement. Eliminating or substantially raising the cap would convert Social Security into an overt income redistribution program. If that is the direction Congress wants to go, we should all then end the pretense that Social Security is some kind of "universal" insurance program and call it welfare for poor seniors.
Such a payroll tax hike would also eviscerate Mr. Bush's most impressive domestic achievement: the pro-growth tax cuts. If the tax cap were eliminated entirely, the President would be signing into law one of the largest tax hikes in U.S. history, or more than $1.3 trillion in new taxes over the first 10 years alone. About seven million families with an income of less than $150,000 a year would be hit with a tax increase of up to $6,000 a year.
This would also be a major tax hike on small-business employers, who pay half of the payroll levy (workers pay the other half themselves). As Mr. Bush's first chief economic adviser, Lawrence Lindsey, puts it: "The President would thus be not just raising taxes on entrepreneurs to well above the levels that prevailed in the Clinton administration, but to a rate higher than Carter." Some "legacy."
But wouldn't this all be worth it if we could take those future, unfunded liabilities off the books? Only if you think a tax increase now is worth a promise to cut benefits later. No one serious thinks those benefits will be paid anyway, so why make young current workers pay twice for the sins of their fathers?
Such a tax hike-benefit cut compromise would only exacerbate the generational inequity of Social Security. The paramount scandal of Social Security is not its insolvency but rather its abysmally low rate of return for new workers. Even if the payroll tax were left alone and all promised benefits were eventually paid out to young workers, these workers would get a tiny real annual rate of return of 1% to 1.5% on average, according to a Cato Institute analysis. Even a risk-free government bond pays 3% to 4%.
Taking personal accounts off the table eliminates the only option that will provide a better rate of return for future generations. As the nearby chart shows, personal accounts earning market returns would provide roughly twice as high an annual benefit to low income workers upon retirement, three times as high a benefit for middle income workers, and four times more to those with an income in today's dollars of $94,200 a year. Mr. Bush was right to link future cuts in benefits for wealthier earners to personal accounts.
As for the politics, Republicans might take note that AARP, the liberal senior lobby, is already calling a tax increase essential to a "balanced plan" for Social Security. And in a perverse way they're right: Such a plan would raise taxes on moderate-income Republican voters in return for cutting the benefits on those same Republicans. No wonder Democrats like the idea.
A tax increase of any kind with GOP fingerprints would remove the one big political brand advantage that Republicans still have over Democrats. It would make it far easier for Hillary Rodham Clinton to propose another tax increase in 2008 because GOP credibility in fighting the idea would be nil--just as it was in 1992 after Mr. Bush's father raised taxes as part of his "deficit reduction" deal with George Mitchell. If Republicans now let themselves get sucked into a payroll tax increase, they'll deserve the same fate.
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