Under current law, Social Security is supposed to be an “earned benefit,” where taxes are akin to insurance premiums that finance retirement benefits for workers. And because there is a cap on retirement benefits, this means there also is a “wage-base cap” on the amount of income that is hit by the payroll tax.
For 2011, the maximum annual retirement benefit is about $28,400 and the maximum amount of income subject to the payroll tax is about $107,000.
It appears that President Obama wants to radically change this system so that it is based on a class-warfare model. During the 2008 campaign, for instance, then-Senator Obama suggested that the programs giant long-run deficit could be addressed by busting the wage-base cap and imposing the payroll tax on a larger amount of income.
For the past two years, the White House (thankfully) has not followed through on this campaign rhetoric, but that’s now changing. His Fiscal Commission, as I noted last year, suggested a big hike in the payroll tax burden. And the President reiterated his support for a class-warfare approach earlier this week, leading the Wall Street Journal to opine.
Speaking Tuesday in Annandale, Virginia, Mr. Obama came out for lifting the cap on income on which the Social Security payroll tax is applied. Currently, the employer and employee each pay 6.2% up to $106,800, a level that rises with inflation each year. …Mr. Obama didn’t hint at specifics, though he did run in 2008 on a plan to raise the “tax max” by somewhere between two to eight percentage points for the top 3% of earners. …most of the increase could be paid by the middle class or modestly affluent—i.e., those who merely make somewhat more than $106,800. A 6.2% additional hit on every extra dollar they make above that level is a huge reduction from their take-home pay. If the cap is removed entirely, it will also mean a huge increase in the marginal tax rates that affect decisions to work, invest and save. In a recent paper for the American Enterprise Institute, Andrew Biggs calculates that this and other tax increases Mr. Obama favors would bring the top marginal rate to somewhere between 57% and 68% when factoring in state taxes. Tax levels like these haven’t been seen since the 1970s.
Obama is cleverly avoiding specifics, largely because the potential tax hike could be enormous. The excerpt above actually understates the potential damage since it mostly focuses on the “employee” side of the payroll tax. The “employer” share of the tax (which everyone agrees is paid for by workers in the form of reduced take-home wages) is also 6.2 percent, so the increase in marginal tax rates for affected workers could be as high as 12.4 percentage points.
This video from the Center for Freedom and Prosperity, narrated by yours truly, elaborates on why this is the wrong approach.