Sunday, March 06, 2005

Why W is right about raising the SS cap

W stunned many of his supporters by placing on the table the possibility of raising the SS cap.

The Club for Growth blitzed the idea in a press release. Larry Kudlow at National Review dismissed it as "mad cap". Donald Luskin at National Review Online said the idea was "harebrained". Amity Shlaes over at Tech Central Station said this was really a tax on small businesses. The Wall Street Journal worried that the President was negotiating with himself, and negotiating too early.

Unusual in his support was Patrick Ruffini:

Unlike Beltway grasstips conservatives, I'm open to the idea of lifting the payroll cap -- particularly when combined with personal accounts. It would allow substantially more funds to be vested in personal accounts than is currently envisioned, further entrenching support for the idea. Thinking strategically, such a move would increase the appetite for tax reform and AMT relief; broadly, I see the need for this kind of safety valve when the uber-progressive income tax is looked at. And making both payroll and income taxes flatter makes it A LOT easier to enact tax cuts across the board.

Exactly.

1. All of us who support the Ownership Society would prefer to create private SS accounts without raising taxes. But that might not be politically feasible right now.

2. The question is: would the benefit of private accounts be canceled by raising the tax cap for Social Security?

3. Unfortunately, there is no way to do a cost-benefit analysis of that since: a) there is no current agreement on the size of the private accounts to be created; b) nor is there agreement on how high the cap might be raised.

4. But what is clear is the politics of this. Creating private accounts has never been in 70 years. Cutting marginal tax rates has been done numerous times. If W trades private accounts for a hike in the marginal tax rate, there is every reason to believe that very soon--2008, for example--the GOP can campaign on a program of cutting the top marginal rates, either by establishing a flat tax, a consumption tax or some other sharp cut in the top marginal rate. By contrast, the opportunity to create private accounts in Social Security may well come only once in a generation. If we miss this, we may never get another opportunity to introduce free-market principles within Social Security. That is why W is right to put a hike in the tax cap on the table, and that is why he is right to raise this as an option.

5. The more pointed question is whether W is raising this issue too early in the process--negotiating with himself. Probably not. He hasn't said that he would in fact do it--nor has he suggested what kind of an increase would be acceptable. He's said only that he'd talk about it. He's free to reject every single tax cap increase proposal as unacceptable--so he's kept all his options open.

It would certainly be preferable to introduce private accounts into Social Security without any increase in the tax cap at all. But it would be better to have private accounts with an increase in the tax cap than not to have private accounts at all. This is in all likelihood a once-in-a-generation opportunity to change for the better the biggest domestic spending program in the US government--carpe diem! There will be another day--probably as early as 2008--to cut the marginal tax rates down to size.

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