THE PAYROLL TAX TRAP
December 28, 2006
Giving in to Democrats and eliminating or substantially raising the payroll tax cap in return for promised future benefit cuts would do little to help future generations' retirement and only hurt economic growth today, says the Wall Street Journal.
- If the tax cap were eliminated entirely, it would represent one of the largest tax hikes in U.S. history, or more than $1.3 trillion in new taxes over the first 10 years alone.
- About seven million families with an income of less than $150,000 a year would be hit with a tax increase of up to $6,000 a year.
- This would also be a major tax hike on small-business employers, who pay half of the payroll levy (workers pay the other half themselves).
What's more, a tax hike-benefit cut compromise would only exacerbate the generational inequity of Social Security, says the Journal:
- The paramount scandal of Social Security is not its insolvency but rather its abysmally low rate of return for new workers.
- Even if the payroll tax were left alone and all promised benefits were eventually paid out to young workers, these workers would get a tiny real annual rate of return of 1 percent to 1.5 percent on average, according to a Cato Institute analysis.
Taking personal accounts off the table eliminates the only option that will provide a better rate of return for future generations, says the Journal. Accounts earning market returns would provide roughly twice as high an annual benefit to low income workers upon retirement, three times as high a benefit for middle income workers, and four times more to those with an income in today's dollars of $94,200 a year.
Source: Editorial, "The Payroll Tax Trap," Wall Street Journal, December 27, 2006.
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