Opinion Editorial | |
| Wednesday, January 14, 1998 | |
Kennedy's Payroll Tax Gamble |
On December 11 Sen. Edward Kennedy (D-Mass.) gave a widely reported speech
in which he outlined a liberal legislative agenda. Among his initiatives
is a proposal to reduce the Social Security tax by eliminating the limit
on taxable wages.
According to the White House Bulletin, many Republicans in Congress are
intrigued by the Kennedy proposal. It quotes an unnamed congressional GOP
strategist as saying it "threatens to sweep the place" and "there
is a real good chance" that there may be action on the issue this year.
The report further indicates that Sen. Kennedy's office has discussed the
idea with the White House and gotten "encouraging words." The rationale for the Kennedy plan is that it would reduce payroll taxes
for all workers earning less than $80,000 per year. This is important because
for most workers the payroll tax is the single biggest tax they pay, exceeding
their federal income taxes. Moreover, the payroll tax is a significant
cost of business, forcing companies to pay higher wages. Small businesses,
in particular, are especially hard-hit by the payroll tax because the self-employed
must pay both the individual and business share of the tax, for a total
of 12.4 percent. Senator Kennedy says his plan would not increase the federal deficit
or threaten the Social Security system's finances, because it would be revenue
neutral. Therefore, on the face of it, it appears to be a win-win plan,
cutting taxes for most workers while raising taxes for only for the rich. There are two major problems with this logic, however. The first is
that Kennedy's plan will lead to higher benefits for the rich. The reason
is because benefits are tied to taxable wages. If the amount of a worker's
taxable wages increases, as it would under the Kennedy plan, they will receive
higher benefits when they retire. According to economist Eugene Steuerle
of the Urban Institute, "benefit gains for those with very high incomes
would be significant." In fact, the purpose of the taxable earnings
limit is precisely in order to keep rich people from receiving excessive
Social Security benefits. The second problem with the Kennedy plan is the disincentive effects
of the higher tax rate for those with upper incomes. It will discourage
work effort among those with high wages, such as doctors. And it will encourage
corporate executives to take more of their compensation in the form of "unearned"
income not subject to the payroll tax, such as stock options. Of course,
low and moderate income workers will have a greater incentive to work and
earn taxable income. However, economist Steve Entin of the Institute for
Research on the Economics of Taxation estimates that "on an income-weighted
basis, there would be a net reduction in work incentives economy-wide." Consequently, Entin believes that the Kennedy plan is not revenue neutral.
He calculates that the government will receive only 75 percent of the revenue
Senator Kennedy estimates. Moreover, it does not appear that Senator Kennedy
has taken any account of the higher benefits that will be paid out. Therefore,
the plan would significantly increase the federal budget deficit and worsen
the finances of the Social Security system. Given the already precarious
state of Social Security's finances, the Kennedy plan too big a gamble to
take. Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis),
January 14, 1998.
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