A Bush Tax Increase on the Horizon?

More than the ascension of Nancy Pelosi & Co. was disturbing congressional Republicans last week. They worried that George W. Bush may proceed down the same path that made his father a one-term president. Thus, they ask this question: Will the current President Bush embrace a tax increase that would produce potential economic disaster and guaranteed political catastrophe?

Henry M. Paulson Jr. is a shark on Wall Street but a rookie on Pennsylvania Avenue. As Bush’s third secretary of the Treasury, he has engaged in secret bipartisan talks discussing an increase in the current $97,500 limit on personal income subject to the Social Security payroll tax. That would spike up the top marginal tax rate, demolishing supply-side tax principles that Republican administrations have purportedly followed for 26 years.

Paulson certainly has given the impression in those discussions that he is amenable to raising the payroll tax, but a senior White House aide cautions this decision has not yet been made. "There is somebody higher than Hank Paulson, and it is George W. Bush," he told me. Presidential adviser Karl Rove (who was not the aide I just quoted) attended conservative activist Grover Norquist’s weekly meeting last Wednesday and offered to bet anyone $5 that there would be no increase in the payroll tax base. But Bush himself has not unequivocally ruled out such a move, as he has in rejecting any increase in the personal income tax.

White House spokesman Tony Snow, an ardent supply-sider as a columnist and commentator who must be personally against a higher payroll tax, dances around the question in public briefings. Congressional Republicans are running into a stone wall from usually cooperative Treasury and Social Security administration officials when they request economic data that would demonstrate the folly of lifting the payroll cap.

But Paulson is the source of most Republican apprehension. He has engaged in private talks with Republican Sen. Lindsey Graham of South Carolina and Sen. Joseph Lieberman of Connecticut, who now calls himself an "Independent Democrat." Graham for more than two years has been seeking Lieberman’s participation in a bipartisan Social Security reform that includes a higher payroll tax base.

When Graham began crafting his compromise in November 2004, the premise was that each party would accept something painful. In return for Republicans agreeing to payroll taxes on higher income, Democrats would have to swallow Bush’s proposed personal retirement accounts, which would be financed by cutting into payroll taxes that now all go into Social Security. But no Democrat, not even Lieberman, is willing to accept that. Democrats refuse to talk with Republicans about personal accounts "carved out" of the present system.

Indeed, a "carve out" is now a dead letter. New personal retirement accounts could be passed only as an "add on" — financed voluntarily by individuals whose contributions to Social Security would remain unchanged. Higher payroll taxes would be imposed only to save the present system as part of a broader entitlement reform.

Republican concern over such an outcome stems in no small part from the belief that multi-millionaire Paulson has entered a realm foreign to him. One well-placed House Republican, asking that his name not be used, expressed alarm that a financier who sold $485 million worth of Goldman Sachs stock in order to be confirmed at the Treasury cannot appreciate how the payroll tax ravages self-employed businessmen and farmers.

Eliminating the cap on payroll taxes would constitute the largest tax increase in U.S. history, estimated by the Heritage Foundation during the last Congress at $1.4 trillion over 10 years. This analysis predicted that such a step would cost nearly a million jobs and more than $55 billion in projected personal savings.

The economic woe resulting from higher payroll taxes would be matched by political damage to the president if this outcome were adopted by the Democratic-controlled Congress with his approval but support from only a few Republican legislators. That political calamity can be averted if Bush takes any payroll tax increase off the negotiating table, just as Democrats refuse to talk about a partially privatized Social Security system.


Note: Aides to newly elected Democratic Sen. Jon Tester of Montana say this column last week incorrectly referred to him as pro-life when in fact he is pro-choice.