There’s a twin threat coming on taxes this spring. Just recently, Treasury Secretary Hank Paulson declared that “everything should be on the table” in regard to discussions about Social Security. Translating this from the Washingtonese, this means the administration — or at least Paulson — is willing to consider raising the Social Security payroll-tax cap, and possibly even the 12.4 percent payroll-tax rate.
On the same day Paulson made this statement, chairman Charles Rangel of the House Ways and Means Committee said that “we may be talking about redirecting” the 2001 tax cuts towards the middle class. Of course, Democrats differ with average Americans on the definition of the “middle class,” a discovery many Americans made when President Clinton was raising taxes in 1993. But the bottom line is that Rangel and the Democrats don’t want to make President Bush’s 2001 tax cuts permanent, which means a huge tax increase will be coming in 2010.
The Senate Budget Committee has taken the first step towards this tax hike by adopting, on a party-line vote, a budget that lifts federal spending. This money can only come from one place: your wallet. Meanwhile, a Social Security payroll-tax increase could provide enough money for the Democrats to claim they are “reducing” the budget deficit even as federal spending continues to careen out of control.
At least the Democrats are being honest about their belief in big government and the need to find money to pay for it. But why would the Bush administration consider any sort of tax increase?
Some political observers think a “grand bargain” on Social Security, supposedly designed to protect the system for future generations, is in the works. Such a bargain would raise the cap on the payroll tax and perhaps even the payroll-tax rate itself. This could be a legacy issue for President Bush, particularly after the failure of the Republican Congress to adopt meaningful Social Security reform in 2005.
But then again, the president has opposed raising the payroll-tax rate. So why would he change his position now? Raising taxes will do just as much harm to the economy now as it would have two years ago — and perhaps even more harm today when one takes into account the recent ups and downs of the stock market and the obvious concern of investors about the economy.
Republicans who talk of raising the payroll-tax cap may appear bold and courageous to national reporters, but this policy is both economically unwise and politically dangerous. Rather than hinting at the viability of a cap increase, Secretary Paulson should be taking a cue from Sen. Jim DeMint (R., S.C.), who responded to a question about an earlier Social Security reform plan by saying, “I’ve encouraged Republicans not to talk about tax increases or benefit cuts until Democrats put forth their ideas.” Or as Gov. Mark Sanford (R., S.C.) said at the time, “You can’t lose sight of how important lowering — not raising — taxes is.”
What should the president do? Does he really want to be the second Bush to have his name associated with general tax increases on the American people? Isn’t the better legacy a strong economy, such as the ones presidents Reagan and Clinton could boast?
It is politically advantageous for Democrats to try to back a Republican president into a corner and then blame him for raising taxes. But it’s also bad economics for everyone involved. The simple fact is that a dollar of higher Social Security payroll taxes is the same as a dollar of higher income taxes to the person who pays these taxes.
A tax increase is a tax increase.
– Mallory Factor is the chairman of the Free Enterprise Fund. A version of this article original ran in the The Post and Courier.