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.