The big­gest tax in­crease in his­tory?

The Washington Times Weekly - - Commentary - Robert No­vak

More than the as­cen­sion of Nancy Pelosi & Co. was dis­turb­ing con­gres­sional Repub­li­cans two weeks ago. They wor­ried that Ge­orge W. Bush may pro­ceed down the same path that made his fa­ther a one-term pres­i­dent. Thus, they ask this ques­tion: Will the cur­rent Pres­i­dent Bush em­brace a tax in­crease that would pro­duce po­ten­tial eco­nomic dis­as­ter and guar­an­teed po­lit­i­cal catas­tro­phe?

Henry M. Paul­son Jr. is a shark on Wall Street but a rookie on Penn­syl­va­nia Av­enue. As Mr. Bush’s third sec­re­tary of the Trea­sury, he has en­gaged in se­cret bi­par­ti­san talks dis­cussing an in­crease in the cur­rent $97,500 limit on per­sonal in­come sub­ject to the So­cial Se­cu­rity pay­roll tax. That would spike up the top mar­ginal tax rate, de­mol­ish­ing sup­ply-side tax prin­ci­ples that Repub­li­can ad­min­is­tra­tions have pur­port­edly fol­lowed for 26 years.

Mr. Paul­son cer­tainly has given the im­pres­sion in those dis­cus­sions that he is amenable to rais­ing the pay­roll tax, but a se­nior White House aide cau­tions this de­ci­sion has not yet been made. “There is some­body higher than Hank Paul­son, and it is Ge­orge W. Bush,” he told me. Pres­i­den­tial ad­viser Karl Rove (who was not the aide I just quoted) at­tended con­ser­va­tive ac­tivist Grover Norquist’s weekly meet­ing on Jan. 3 and of­fered to bet any­one $5 that there would be no in­crease in the pay­roll tax base. But Bush him­self has not un­equiv­o­cally ruled out such a move, as he has in re­ject­ing any in­crease in the per­sonal in­come tax.

White House spokesman Tony Snow, an ar­dent sup­ply-sider as a colum­nist and com­men­ta­tor who must be per­son­ally against a higher pay­roll tax, dances around the ques­tion in pub­lic brief­ings. Con­gres­sional Repub­li­cans are run­ning into a stone wall from usu­ally co­op­er­a­tive Trea­sury and So­cial Se­cu­rity ad­min­is­tra­tion of­fi­cials when they re­quest eco­nomic data that would demon­strate the folly of lift­ing the pay­roll cap.

But Mr. Paul­son is the source of most Repub­li­can ap­pre­hen­sion. He has en­gaged in private talks with Repub­li­can Sen. Lind­sey Gra­ham of South Carolina and Sen. Joseph Lieber­man of Con­necti­cut, who now calls him­self an “In­de­pen­dent Demo­crat.” Mr. Gra­ham for more than two years has been seek­ing Mr. Lieber­man’s par­tic­i­pa­tion in a bi­par­ti­san So­cial Se­cu­rity re­form that in­cludes a higher pay­roll tax base.

When Mr. Gra­ham be­gan craft­ing his com­pro­mise in No- vem­ber 2004, the premise was that each party would ac­cept some­thing painful. In re­turn for Repub­li­cans agree­ing to pay­roll taxes on higher in­come, Democrats would have to swal­low Mr. Bush’s pro­posed per­sonal re­tire­ment ac­counts, which would be fi­nanced by cut­ting into pay­roll taxes that now all go into So­cial Se­cu­rity. But no Demo­crat, not even Mr. Lieber­man, is will­ing to ac­cept that. Democrats refuse to talk with Repub­li­cans about per­sonal ac­counts “carved out” of the present sys­tem.

In­deed, a “carve out” is now a dead let­ter. New per­sonal re­tire­ment ac­counts could be passed only as an “add on” — fi­nanced vol­un­tar­ily by in­di­vid­u­als whose con­tri­bu­tions to So­cial Se­cu­rity would re­main un­changed. Higher pay­roll taxes would be im­posed only to save the present sys­tem as part of a broader en­ti­tle­ment re­form.

Repub­li­can con­cern over such an out­come stems in no small part from the be­lief that multi-mil­lion­aire Mr. Paul­son has en­tered a realm for­eign to him. One well-placed House Repub­li­can, ask­ing that his name not be used, ex­pressed alarm that a fi­nancier who sold $485 mil­lion worth of Gold­man Sachs stock in or­der to be con­firmed at the Trea­sury can­not ap­pre­ci­ate how the pay­roll tax rav­ages self­em­ployed busi­ness­men and farm­ers.

Elim­i­nat­ing the cap on pay­roll taxes would con­sti­tute the largest tax in­crease in U.S. his­tory, es­ti­mated by the Her­itage Foun­da­tion dur­ing the last Congress at $1.4 tril­lion over 10 years. This anal­y­sis pre­dicted that such a step would cost nearly a mil­lion jobs and more than $55 bil­lion in pro­jected per­sonal sav­ings.

The eco­nomic woe re­sult­ing from higher pay­roll taxes would be matched by po­lit­i­cal dam­age to the pres­i­dent if this out­come were adopted by the Demo­cratic-con­trolled Congress with his ap­proval but sup­port from only a few Repub­li­can leg­is­la­tors. That po­lit­i­cal calamity can be averted if Mr. Bush takes any pay­roll tax in­crease off the ne­go­ti­at­ing ta­ble, just as Democrats refuse to talk about a par­tially pri­va­tized So­cial Se­cu­rity sys­tem.

Robert No­vak is a na­tion­ally syn­di­cated colum­nist.

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