Daily Debunker

June 6, 2005

In the Billings Gazette, personal finance columnist Jeff Brown cites Rep. Robert Wexler's bill for Social Security reform as being "far better than the current Bush scheme." But Wexler's bill--which would levy a 6 percent payroll tax on all income over $90,000--would destroy the link between contributions and benefits, impose huge new burdens on businesses and therefore tighten the labor market, and wreak havoc on the economy.

Brown seems to suggest that because plans to eliminate the tax cap tend to poll well with his readers, they are therefore good plans. That's a fairly dangerous assertion for a columnist that purports to provide sound financial advice to lay readers.

Raising or eliminating the cap without a corresponding rise in benefits would eliminate the link between what people put into the system and what they get back. That link is crucial, however, for those who would argue that Social Security is a social insurance program, which Wexler does. Ordinary Americans who work hard to provide for themselves and their families should, and undoubtedly will, be appalled at the suggestion that Social Security in the future will require direct subsidies from the rich in order to pay benefits, which is exactly what Wexler is proposing. Making the rich pay so much more for no additional benefits will effectively make everyone earning less than $90,000 a supplicant of the government in their retirement. The future under Wexler's bill is a future without retirement dignity.

Additionally, the increase in taxes on businesses will hamper the ability to increase wages and salaries for those whose earnings are at or near the current payroll tax cap. If raising a worker's salary costs an employer not just the cost of the raise, but also an additional 3 percent, employers are likely to either find ways to avoid raising salaries above the cap or find ways to cut costs at the bottom. And for those whose work is worth the extra tax burden, the money spent on the new payroll tax is money that could have been spent directly on the worker--salary raises for everyone above the tax cap will be smaller than they otherwise would've been.

Finally, the Wexler bill and plans like it won't just hurt those at the top. Studies have shown that increases in marginal tax rates tend to create significant deadweight losses; and this particular tax increase is a whopper. Tax avoidance--be it through exploitation of legal loopholes, lower productivity, or illegal means--won't just mean that Social Security will receive less than expected due to lower reported income. It also means that less will be collected through income taxes, contributing greatly to our already skyrocketing annual deficits and long term debt.

The problems facing our entitlement programs can't be solved through traditional tax and spend measures. In an era when tax rates around the world are falling to accommodate global economic competition, we cannot afford to take productive money out of our economy. The problems must be solved through mechanisms that will create new wealth, rather than spreading thinly the wealth that already exists.