Earlier this week, President Bush seemed to put tax increases on the table as part of a Social Security deal. The payroll tax currently applies only to the first $90,000 of wages. If you make more than that, payroll taxes are not taken out of your additional wages. Bush was asked whether he would support raising that “cap” on payroll taxes. His answer: “The only thing I’m not opened-minded about is raising the payroll tax rate. And all other issues are on the table.”
So he is open to raising the cap. That’s a tax increase, and potentially–depending on how high the cap were lifted–a massive one.
It also puts Bush and other Republicans on a collision course with a pledge they have signed. Grover Norquist has gotten most Republican lawmakers (Bush, 222 members of the House, and 46 of the Senate) to pledge neither to raise marginal tax rates on income nor to eliminate any tax breaks without compensatory tax cuts. Norquist’s pledge is one of the reasons that no Republican congressman has voted for a broad-based tax increase in 15 years.
Raising the payroll tax cap would violate that pledge unless it was part of a bill that also includes tax cuts of the same size. So, for example, the president might cut the payroll-tax rate while having that tax rate apply to more income. That would make the payroll tax more progressive. Whether it would be a tax cut or a tax increase, overall, would depend on the specifics: how much the rate was cut, and how much the cap was raised.
Personal accounts could be seen as a kind of conditional tax cut. The government would be letting people keep some of their money so long as they agreed to put it in relatively safe investments. So a Social Security bill that raised the tax cap and created personal accounts could be compatible with the pledge–again, depending on the specifics.
I ran that argument by Norquist, and he was skeptical. He accepted the idea that personal accounts are tax cuts, and that whether a bill broke the pledge would depend on the details: “You’d have to take a look at the numbers [for] each year.”
But even if it did meet the requirements of the pledge, he noted, raising the cap would create other problems. For one thing, taxes would certainly go up for some people under any such deal. Those people would disproportionately be Republican voters. (Other conservatives have also argued that the increase in marginal tax rates would harm the economy.)
Second, he argues that raising the tax cap would lessen the pressure for any other change to Social Security policy. Raising the cap might extend the program’s solvency for six years, he says. “You get six years to think about things.”
Third, Norquist thinks that raising the issue sets up a political dynamic that is unfavorable to reform and to Republicans. “The House is not going to pass this,” he says. “The Senate is not going to pass [a Social Security bill] without it. You’re not going to get [Senate] Democrats for anything less than that.” Raising the cap, in other words, has become the president’s opening bid.
Not for the first time, he is taking a big risk.