Tax Hike Will Torpedo Social Security Reform

By Stephen Moore and Phil Kerpen Is another George Bush thinking of breaking his no new tax pledge? Last week a reporter from the New Haven Register asked Bush if he would raise payroll taxes on workers earning more than $90,000. He surprisingly responded that the issue is “on the table,” and that he is “interested in good ideas.” From a president who has made tax cuts the centerpiece of his domestic agenda, this is a full scale ideological retreat. It also is a serious setback to the creation of personal retirement accounts for Social Security. House Republicans have made it clear they won’t go for any Social Security plan that hikes taxes. They are right to draw a clear line in the sand, so the White House gets back on the side of virtue and growth in this debate. Even raising the payroll cap from $90,000 to $125,000 would increase the tax burden by up to $4,300 a year for people earning this level of income, as the table below shows. And few with incomes in that range consider themselves rich. The most popular analogy for the politics of Social Security reform is the Hillarycare fight of 1993. This analogy is not only the overarching theme of many media accounts of the politics of Social Security, but appears to also be the basis of the Democrats’ strategy. President Bush is trying to avoid such a political Pearl Harbor by flirting with the option that he will raise taxes to “pay for” Social Security reform. But by trying to reach across the aisle to win the support of liberal Democrats, Bush is risking a mass exodus of his own conservative Republican supporters. The House Republican Study Committee has announced its members won’t vote for a tax hike to fix Social Security. Some Republicans are now even fretting that Bush will use the “No Child Left Behind” model on Social Security reform. That disastrous education bill ended up massively expanding government while dropping the voucher component that was its essential conservative feature. Medicare prescription drugs led to the same kind of civil war within the party with conservatives getting the shaft. This is hardly the course Bush should traverse to win his admirable goal of personal accounts for Social Security. On Social Security, many Democrats acknowledge that reform is necessary. The strongest case they have made against change is that the problem has not yet reached “crisis” proportions. The Democratic opposition has focused squarely on the creation of personal accounts. In fact, the main argument has been that money from the public Social Security system would be diverted into private accounts, worsening Social Security’s financial problem. That criticism should sound familiar. It’s precisely the argument that was made against school vouchers four years ago–that vouchers for private schools would divert money from the public school system. And just as the AARP is now mobilized to fight against personal accounts, the teachers unions were dead set against vouchers. Bush ended up working with Ted Kennedy to pass a bill that has boosted federal education spending by a staggering 98% in four years, but left school vouchers on the cutting board. Raising the payroll cap would mean a tax hike of over $1,200 a year for a family with a $100,000 income. This would cancel out many of the gains of the Bush income tax cuts in the first term. These workers already pay over $11,000 a year in Social Security payroll taxes (the effective tax burden includes both the employer and the employee share) for a retirement benefit that is nowhere commensurate with what these workers paid in. Why make a bad deal worse? If Bush opts for an unholy tax hike compromise with Senate Democrats instead of a tough fight, we’ll be looking at a left leaning bill that increases payroll taxes on working Americans and cuts benefits–implicitly if not explicitly–for retirees. Fifty years ago, there were 16 workers for every retiree. Now there are three, and soon there will be only two. As Alan Greenspan recently pointed out, if Social Security continues to be a transfer payment, it will place an incredible strain on workers in the near future, which would derail economic growth. Higher taxes would kill jobs, slow the economy, and harm the financial markets. For four years George Bush has consistently delivered a pro-growth, anti-tax message to the American people. He knows that payroll tax hikes are job killers. That’s too high a price to pay to win the support of Ted Kennedy. Don’t go there, Mr. President.

Payroll Tax with Lifted Cap
Tax Hike by Lifting the Cap — Amount
Tax Hike by Lifting the Cap — Percent