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Scrap the cap? The Social Security debate gets taxing

By W. James Antle III
web posted February 21, 2005

If there's one lesson George W. Bush seems to have learned from his father's presidency, it's this: Don't support a broad-based tax increase, or conservatives will abandon you.

Say what you will about Bush 43's record on spending and borrowing, in spite of the red ink he has held the line on taxes. In fact, he signed four major tax-cut packages in his first four years in office. His income-tax rate cuts in 2001 and dividends-tax cut in 2003 were the biggest federal tax reductions since the Reagan years. These tax cuts have certainly kept economic conservatives who otherwise would have been disillusioned on board with the administration. And they didn't hurt with the voters when he ran for reelection in 2004, either.

With this recent history in mind, it's a surprise to discover that Bush's pledge not to raise taxes as part of a Social Security plan was more malleable than it seemed during the State of the Union address. In response to a reporter's question about lifting the cap on payroll taxes used to fund the vast entitlement program, Bush pointedly responded, "The only thing I'm not opened-minded about is raising the payroll tax rate. And all other issues are on the table."

Will these two Bushes share the same legacy: Reneging on a tax promise?: George W. Bush Will these two Bushes share the same legacy: Reneging on a tax promise?: George H.W. Bush
Will these two Bushes share the same legacy: Reneging on a tax promise?

It doesn't take too much reading between the lines to reach this conclusion: Bush isn't open to raising the payroll tax rate. But if it would buy a few Democratic and wavering Republican votes, he might be willing to go along with an increase in the income levels at which those payroll taxes apply.

The payroll tax is currently levied against the first $90,000 of wages. Anything a worker earns beyond this is not taxed. Raising the cap would make the payroll tax less regressive. But it would also be a broad-based tax increase.

Here Bush is treading dangerously close to read-my-lips territory in the service of a politically complex Social Security reform gambit that has so far counted movement conservative enthusiasm among its chief advantages. How many of these free-market conservatives will go along with a tax increase, especially one that targets their political base?

National Review's Ramesh Ponnuru has also pointed out that without offsetting tax cuts, lifting the payroll-tax cap would also force most congressional Republicans to violate pledges not to increase marginal tax rates. Bush, 46 Senate Republicans and 222 Republicans in the House have all signed the Grover Norquist inspired-pledge.

Eliminating the cap entirely would significantly boost economy-wide marginal tax rates, perhaps by over 12 percentage points. Even raising it to $110,000 would come at a steep economic price, reducing work incentives and boosting family tax burdens. But it might be made more palatable to at least some Republicans if accompanied by a lower payroll tax rate and strong personal accounts.

The Bush administration may be following in the footsteps of Sen. Lindsey Graham (R-S.C.), the first prominent and mostly conservative GOP lawmaker to put the payroll-tax cap on the table. Earlier this year, syndicated columnist Robert Novak reported that Graham was able to find some key Democrats at least willing to talk about personal accounts in a reform plan that included a higher payroll-tax ceiling.

Graham proposed many of the same things the president mentioned in the State of the Union – allowing workers under 55 to set aside 4 percentage points of their payroll taxes into personal accounts, leaving those over 55 alone – but the bill he filed last year also included higher tax rates for those who prefer to remain in traditional Social Security. In a November speech to the Heritage Foundation, the senator also argued that raising the payroll tax cap would finance the much commented upon transition costs without federal borrowing.

At first, it sounds like the makings of a grand Social Security reform compromise. But many observers don't think a higher payroll tax cap could pass the House. Public statements by House Majority Leader Tom DeLay (R-Tex.) seem to support this analysis. In light of this, whetting the Democrats' appetite for higher taxes may serve only to jeopardize reform.

It's also not clear that conservative Republican holdouts would be wrong to balk at the idea. A decidedly anti-growth tax policy shift would seem to work against some the goals of free-market Social Security reform. More importantly, would it signal that the White House is open to further compromises that will dilute any pro-market aspects with big-government add-ons? Conservatives have been down this road before (see my article in the March 14 issue of The American Conservative).

Can Bush keep the right on board his Social Security reform initiative while he launches trial balloons about higher taxes? The answer may determine whether the president ends up with a domestic-policy achievement on the order of 1996's welfare reform, or makes tax-pledge-breaking political debacles a family tradition.

W. James Antle III is an assistant editor of The American Conservative and a senior editor for Enter Stage Right. The views expressed above represent his alone.

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