Lots of bad ideas to save Social Security they float. Two US senators, at New York Times, he just proposed a terrible one that would crush both the system and the economy.
For years we’ve been bombarded with stories about Social Security collapsing in the early 2030s. Trust funds pay out more in benefits than they collect in payroll taxes. The supposed evil is that we are living longer and that the number of workers is insufficient to pay for the promised benefits.
Senators Elizabeth Warren (D–MA) and Bernie Moreno (R–OH) propose removing the earnings cap—$184,500—on wages taxable for Social Security. The 12.4% tax, which is split between employer and employee, stops at this level. They want the cap off.
Not surprisingly, one of the sponsors is Senator Warren, a socialist in all but name. But Sen. Moreno is a Republican and represents a troubling trend among some in the GOP who believe the path to victory is to indulge in populist sentiment, whether it’s raising taxes on the so-called rich, imposing price controls on pharmaceuticals (which would ultimately stifle innovation, just as it is eroding power in Europe). rail charterers to hire unnecessary train crews), opposing Israel, scapegoating high prices or emulating the old socialists by taking ownership stakes in companies in the name of national security. These republicans should ask how well such harassment has done for the Conservative Party in Britain, which is now on life support.
The plan proposed by these two senators would be one of the largest tax increases in history. It would essentially send the top income tax rate to over 50%, a level not seen since 1969. About 5 million Americans earn above that $184,500, and the number is rising, thanks to inflation and an improving economy. The tax increase would disproportionately hit people in high-cost, high-tax blue states like New York and California — and Massachusetts. This ludicrous idea would hurt the economy by diverting trillions of dollars of potential capital away from the private sector.
The billionaires who are so hated by Democrats and some Republicans have ways of escaping this tax. Those who get most of their pay in wages will be hit.
The tax would lead to a proliferation of ways to avoid the higher levy. Tax havens and other schemes will proliferate. Significantly more time and brainpower will be diverted from productive activities to such dead-end endeavors. And that would hurt the economy.
Such avoidance efforts would lead to cries for payroll taxes to be applied to non-wage income such as dividends. It would fuel proposals for a national wealth tax. This means even more capital destruction and less investment for productive growth, another negative for future prosperity.
There are two big things that taxpayers like these senators never understand. First, taxes are a price and a burden. Real-world experience shows time and time again that when you raise the price of productive work and success, you get less of it. Less growth means less revenue to pay Social Security benefits, among other things. Second, the victims of higher taxes don’t stand still and get shorn like docile sheep. These two facts mean that revenue estimates from higher levies rarely materialize.
Another fact these tax fanatics fail to understand is that predictions of Social Security’s collapse are based on historically low rates of economic growth and productivity. For most of our existence as a nation, we have averaged 3%-3.5% growth. Sensible government policies make this eminently possible, which postpones sentencing for many years.
The best answer for the future of Social Security is to create personal accounts with appropriate regulations for younger people, into which a portion of their payroll taxes will be deposited. This would turn Social Security from a capital destroyer to a capital creator. And participants would receive far greater benefits than the current system can provide.
Another thing: politically, there is no way Social Security benefits will be cut.
