Thursday, April 17, 2008

Be Careful With That Tax Cap....

Perhaps its understandable that Obama remains fixated on fixing the Social Security "crisis" despite far more pressing concerns for our economy (such as Medicare/Medicaid costs), as it appears to be a media obsession. But the "solution" of a substantial increase in the cap is not a good one.

Let's remember that it's not only taxes that are capped, but also benefits. There's an essential deal with the upper middle class and wealthy - they continue to participate in the Social Security program at a level not substantially disproportionate to the benefits you will eventually receive, with their tax contributions propping up the entire system. At the other end, when the U.S. Treasury has to "buy back" the bonds that constitute the Social Security trust fund, it is difficult to imagine how income taxes won't have to be raised, and the wealthy will also bear the brunt of any tax increase. (Either that, or we further explode the deficit to pay back the money owed to the trust fund.)

If you significantly change that balance, such that Social Security goes from being an acceptable deal to being a raw deal in the eyes of higher income earners, you create an incentive for them to walk away from the system. And although we like to pretend otherwise, these are the people who have the ear of Congress. They're also the group that, on the whole, prefers that the "crisis" be fixed through such measures as reducing benefits to early retirees and raising the retirement age.

Raising the cap will also likely inspire more small businesspeople to incorporate, draw a salary below the cap, and pay themselves additional "profits" free of "self-employment" taxes.

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