The Macomb Daily
Biden can’t pay for everything by just taxing the wealthy
The Biden administration has big plans to expand the government’s role in the economy. It’s also promising that no one who earns less than $400,000 will pay more in taxes. We can’t have both. Even paying for current government will require that everyone level up their contri- butions or learn to live with fewer government services.
Social Security is the elephant in the room. If nothing is done to increase funding for the program, benefits will have to be cut 20% in the next 10 to 12 years as reserves run dry and we have fewer people paying in to cover the outflows. That’s clearly unacceptable because many seniors depend on that money. The sooner we address the problem, the smaller the cost will be to fix it.
Yet the Biden administration’s only solution so far has been to increase taxes on high earners, starting with lifting the cap on earnings subject to payroll taxes.
(The tax rate is actually 12.4%, not 6%, when you include the employer contribution.)
As it stands now, only earnings up to $160,200 are subject to the 12.4% payroll tax that finances the Social Security benefits paid (mostly) to seniors. Eliminating the cap sounds like an easy way to restore solvency that will only affect a few rich people. But the numbers don’t add up.
Rich people only have so much money and there’s a limit to what you can get by taxing them. Even if we could tax everything they own and earn, it wouldn’t be enough to pay for the government we already have, let alone the additional government many people want.
Suppose this year we subject all income above $160,200 to the 12.4% tax. A worker that earns $250,000 now owes more than $11,000 in new taxes. And assuming they don’t get a larger Social Security benefit in exchange for this tax increase, it still doesn’t solve the problem. Eliminating the cap only covers 75% of Social Security’s long-term shortfall. If the 12.4% tax kicks in on income above $250,000, only 73% of the shortfall is covered, and we get even less if the tax is applied only to income above $400,000, as Biden proposes.
Obviously, this is a very large tax increase that should give everyone pause. If we get rid of the cap, singles who earn more than $200,000 and families who earn more than $400,000 are in a 50%-plus tax bracket when you include state and local taxes. Perhaps it would be worth the cost if preserving Social Security in its current form is all we had to pay for, but it doesn’t even include financing the future of Medicare. Not to mention, retirees are the least likely to live in poverty and we have other things to spend money on.
The latest Congressional Budget Office projections estimate an $18.8 trillion deficit over the next 10 years, and mandatory spending (such as Social Security, Medicare, payments to state and local governments) will take up 15.3% of GDP by 2023. This is about $3 trillion more than last year’s estimate because of rising interest rates and entitlement program costs. And it’s before we pay for the Social Security and Medicare shortfalls that will hit in the next decade.
These estimates only account for the status quo — it doesn’t include Democrats’ other spending priorities, such as restoring the child tax credit, health care for all or student debt relief. It also assumes that our new industrial policy won’t devolve into an expensive jobs program.
It just isn’t realistic to expect the rich to pay for it all. My colleague Brian Riedl at the Manhattan Institute estimates that if we eliminate the cap and add in every other proposed tax on high earners, including high wealth taxes (assuming they are collectable — which is optimistic), we end up with tax brackets for even moderately high earners above 70%. And it’s still not enough to pay for everything, because it will only bring in
$10 trillion in new revenue, well short of the $18.8 trillion we need for current commitments.
The best-case scenario is we get lucky and experience unprecedented levels of economic growth. This would produce more new rich people to tax. But with tax brackets of 70% or more, that’s not likely. There is a limit on how much you can tax people before they work less and take fewer risks, and this harms growth. We are probably not at that point with marginal rates around 40%, but once you get tax brackets above 60% or 70%, it will start to bite.
True, there was a 91% marginal tax bracket in the 1950 and 60s and there was still growth then. But the overall taxes paid by high earners were much lower because the top rates applied to so few people and there were a lot more forms of tax avoidance, driven in part by the need to avoid the higher rates.
The bottom line: We can’t create a government-supported middle class and rely exclusively on large tax increases on high earners and the wealthy to pay for it. If we try that, we’ll end up running large deficits to pay for mandatory spending each year even before any economic shocks — like high interest rates — come along.
If we want a Europeansize government, we will all need to pay European-size taxes. Probably more, actually, since Europeans still don’t have enough to fund their states and aging populations, either. A more realistic solution involves everyone paying more, with the rich paying more on top of that.
We also need to dial back our spending aspirations and make some thoughtful cuts to our benefits, like increasing the retirement age for Social Security and lowering benefits for high earners, and scaling back our aspirations for middle class benefits like the child tax credit or the extremely generous income-based student loan payment programs.