February
23, 2005
Bush's Mad Cap Idea
By
Lawrence
Kudlow
One
of the defining characteristics of the presidency of George
W. Bush has been that he says what he means, and means what
he says. Our CEO-like MBA president has always communicated
his vision in clear and simple terms. Once he establishes
a policy, he moves rapidly to implement it with all the
political force he can muster. You could even argue that
Bush has been the clearest and most reliable presidential-policy
maker since Ronald Reagan — one would have to go back many
more decades to find another chief executive like him. That’s
why his latest gambit on Social Security payroll taxes is
so hard to fathom.
Bush
clearly stated after last November’s election that his visionary
Social Security reform plan to include personal savings
accounts would not countenance payroll-tax increases. Just
this week he undercut that position when he said an increase
in the payroll-tax cap — now $90,000 — would be “on the
table” in forthcoming negotiations with Congress. White
House spokespeople have tried to suggest that an increase
in the payroll-tax cap is not a new tax, and that only a
rise in the payroll-tax rate would constitute a tax hike.
This is nothing but doublespeak. The American public will
see it for what it is.
A front-page
editorial in the New York Sun referred to this episode as
“sins of the father.” Papa Bush, you may recall, pledged
no new taxes. He then broke that pledge with a huge tax
hike in his second year in office. That broken promise,
along with the added tax burden on working Americans, proved
politically catastrophic as Bush 41 was defeated by Bill
Clinton.
Why
has Bush 43 moved into this fudge-factor trial-balloon zone?
It is a politically dangerous space. His proposal could
also have highly negative economic consequences. When John
Kerry floated a payroll-tax cap increase during the last
election campaign, esteemed Harvard professor Martin Feldstein
calculated that a family making $110,000 a year would face
a tax increase of more than $2,700, essentially a 20 percent
hike. According to Americans for Tax Reform, a new tax cap
of $150,000 would increase the combined employer-employee
tax burden by roughly $7,400. The Heritage Foundation estimates
that raising the cap would directly increase taxes for 7
million middle-class families.
Wall
Street economist Michael Darda has also turned in some startling
numbers. Eliminating the $90,000 ceiling on payroll taxes
would boost the top marginal income-tax rate to 47.6 percent
from 35 percent. Darda estimates that after-tax returns
on marginal work effort would fall from 65 cents to 52.4
cents on the extra dollar earned, a 20 percent decline.
This
is big money. What is more, economists have long acknowledged
that the Social Security tax is a direct levy on employment,
increasing the wedge between work effort and reward and
making new jobs more costly. Any hike in the wage tax cap
would most significantly impact small-business owners and
the self-employed — the most dynamic growth sector for job
creation. Should the combined marginal tax rate on personal
income and Social Security wages increase significantly,
both economic and job growth would be greatly deterred.
Ironically,
Harvard’s Feldstein argued that hiking the wage cap would
create a dead-weight loss on the economy and would lead
to significant tax evasion by small-business owners who
have chartered as S-Corps or LLCs. Consequently, the net
revenue gain from a wage-cap increase might be only $14
billion if the cap were hiked to $110,000. While damaging
the economy in terms of rolling back incentives to work,
this small revenue yield would do virtually nothing to solve
the pending Social Security financial problem.
So
why did Bush say it? It is completely out of character for
him to shift positions and negotiate with himself. Certainly,
the economics are just as bad as the politics. And it’s
not as though hundreds of Democrats in the Senate and House
are now rushing to the negotiating table. They’re not. If
this talk continues the president’s political base could
suffer a sizeable morale loss. It might not surface until
the 2006 midterm elections, but it could be quite damaging
to GOP prospects. Fortunately, House Majority Leader Tom
Delay has publicly stated that the lower body will not pass
a Social Security tax hike of any kind — including increased
marginal tax rates or a higher wage cap. Speaker Dennis
Hastert and Rules Committee chairman David Dryer have indicated
the same. They won’t touch a John Kerry tax-hike proposal,
especially one that will inflict serious economic damage.
This is good news.
Let’s
hope George W. Bush gets the message and returns to the
straight talk that has earned him the credibility and respect
of American voters and workers.
Lawrence
Kudlow is a former Reagan economic advisor, a syndicated
columnist, and the co-host of CNBC's Kudlow
& Company.
Send
This Article to a Friend
