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.
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[…] This is not because our personal income tax is reasonable (see dark blue bars), but rather because Barack Obama and Hillary Clinton were unsuccessful in their efforts to bust the “wage base cap” and […]
[…] This is not because our personal income tax is reasonable (see dark blue bars), but rather because Barack Obama and Hillary Clinton were unsuccessful in their efforts to bust the “wage base cap” and apply […]
[…] This is not because our personal income tax is reasonable (see dark blue bars), but rather because Barack Obama and Hillary Clinton were unsuccessful in their efforts to bust the “wage base cap” and apply […]
[…] This is not because our personal income tax is reasonable (see dark blue bars), but rather because Barack Obama and Hillary Clinton were unsuccessful in their efforts to bust the “wage base cap” and […]
[…] This is not because our personal income tax is reasonable (see dark blue bars), but rather because Barack Obama and Hillary Clinton were unsuccessful in their efforts to bust the “wage base cap” and apply […]
[…] This is not because our personal income tax is reasonable (see dark blue bars), but rather because Barack Obama and Hillary Clinton were unsuccessful in their efforts to bust the “wage base cap” and […]
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[…] on producing output that will generate continuing subsidies from statist politicians such as Obama and […]
[…] climbed from 3 percent when the program started to 12.4 percent today. Another option would be to bust the “wage base cap” and impose the payroll tax on more income. Under current law, because the program is supposed to be analogous to private insurance, there’s […]
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[…] there’s a limit on the benefits one can receive and the payments one has to make. As such, it’s silly to assert that the “wage base cap” is somehow improper. But even if one believed in turning Social Security into a pure redistribution scheme, the […]
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[…] And here’s the cartoon version of a post I wrote back in 2011. […]
[…] And here’s the cartoon version of a post I wrote back in 2011. […]
[…] And here’s the cartoon version of a post I wrote back in 2011. […]
[…] And here’s the cartoon version of a post I wrote back in 2011. […]
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[…] And here’s the cartoon version of a post I wrote back in 2011. […]
[…] It is quite clear that President Obama did not earn reelection on his own merits. He presided over one of the worst economies in national history, marked by 7.9 percent unemployment and less than 200,000 jobs created per month (far below the number necessary for growth). The federal debt has grown by over 70 percent since late 2008, and his team failed to even act on the tame recommendations made by his own blue ribbon deficit reduction panel. Instead of telling Americans that we face tough choices and will have to sacrifice something, Obama spouted off populist nonsense about the rich needing to pay their “fair share”, willfully ignoring basic arithmetic. […]
[…] from an “earned benefit” to a redistribution program, which also is widely rejected (though the left has been warming to the idea in recent years because their hunger for more tax revenue is greater than their support for Social […]
[…] from an “earned benefit” to a redistribution program, which also is widely rejected (though the left has been warming to the idea in recent years because their hunger for more tax revenue is greater than their support for Social […]
[…] from an “earned benefit” to a redistribution program, which also is widely rejected (though the left has been warming to the idea in recent years because their hunger for more tax revenue is greater than their support for Social […]
[…] from an “earned benefit” to a redistribution program, which also is widely rejected (though the left has been warming to the idea in recent years because their hunger for more tax revenue is greater than their support for Social […]
[…] an “earned benefit” to a redistribution program, which also is widely rejected (though the left has been warming to the idea in recent years because their hunger for more tax revenue is greater than their support for Social […]
[…] Original post: Obama's Embraces another Class Warfare Proposal – “Tax the Rich … […]
Every dollar that “the people” allow individuals to keep – rather than surrendering to communal use under a centralized plan – is essentially a “tax expenditure” privilege granted by a generous public to individuals. However that is a privilege America can no longer afford.
…that is the new majoritarian doctrine.
Apparently, with annual growth already lagging behind the worldwide average, America can apparently afford to descend to European welfare state incentives to work, where the less educated average American will produce even less than the 2% growth rate European.
Incentives to work, especially high leverage work and excellence, are the only true baseline of growth. Macroeconomic manipulations that reallocate wealth from Peters to Pauls and then back to Peters may have some place but are largely second order effects when it comes to economic growth. Incentives are all that matter for growth; and growth is all that matters when it comes to mid-long-term prosperity. Sure a country that is just transitioning to the welfare model, temporarily inebriated by the illusion of “free” wealth for everyone, will tend to shrug off reduced annual growth and will not experience immediate decline for a few years, until the growth deficit starts compounding. But, alas, by the time decline starts being widely felt amongst the public, the vicious cycle has already become unstoppable: A desperate public in decline will pin its paranoid hopes to ever more redistribution and central planning and vote accordingly – i.e. “lets just take one more suicidal step to at least give ourselves some breathing room and then we’ll find a more permanent solution once we can stand on our two feet again”. But alas, you never stand up again. If, dear public, you did not refrain from eating your seeds when you were prosperous, there’s no hope that you will do so under the desperation of decline. That is why, once a country starts declining, it becomes doomed. That pivotal point has already passed. 2008 was the endgame of American prosperity and ObamaCare was its Waterloo. Now brace yourselves for decline.
On the way down, the rich will get punitive tax rates and the poor will get indirect and direct excise taxes and VAT sooner or later. Because there just isn’t enough money within the rich to keep feeding the irreversible government spending, so the middle class and poor will have to be tapped to feed the collective machine on the way down to decline. But as Mr. Mithell has already pointed out on a few occasions, punitive tax rates on the rich are a prerequisite before expanding taxation to the middle class and poor. There is just, simply and squarely, **NO** scenario or proposal with any chance of majoritarian support that will drop government growth below GDP growth. That is, mathematically, a recipe for ever increasing misery; and decline.
So higher taxes on the rich is the first step that America will take. Then, a combination of
– The relentless compounding of lower annual growth,
– The additional cost of the massive new entitlement called ObamaCare (i.e. 70-80% Medicare for all! at any age! so long as they contribute less than 60-80K to the economy, i.e. not only higher taxation to pay for all this but actual encouragement for people to decrease their current income!),
– The realization that the extra revenue from the rich is just not enough to pay for communal expenditures
– Having reached the French operational point on the Laffer Curve with regards to government revenue.
will lead to a new grand bargain whereby “Every American will just have to pay a little more”: European style Excise Taxes, $9 gasoline, and VAT on everyone.
Oh, this is such a familiar movie, I have seen it so many times. Before Europe united into a block, when every European country was more or less still uncharged of its own destiny, almost every single one, almost independently, played this movie. Will Americans be the only ones to escape? The odds are heavily stacked against American freedom.
Obama is an important part of this, however he is largely a symptom rather than cause. Symptom of an American psyche that is finally falling into the worldwide mediocrity soup of collectivism. Ironically the seminal event that boosted collectivism in America to majority status was : Terrorism. Terrorism marked a new willingness of the American individual to surrender freedom to the collective in exchange for “security” and collectivism gained majority status thus marking the point of no return. So, terrorism was the pivotal event that set the country on course for the Bush-Obama years and the foundation of American decline. So whoever said that terrorism does not work was full of … you know what. When terrorists said that the actual collapse of the WTC “surpassed their wildest expectations” they were sure overlooking the final lethal effect to America’s prosperity: America’s turn towards majoritarian collectivism.
Would collectivism have eventually gained majority status in America even without 9/11? That I cannot tell. But 9/11 definitively marked the turning point.