Krugman's right that the size of this one Obama hike in marginal tax rates for the rich has been vastly underplayed in the press. High-marginal rates in themselves are not a good thing--they encourage tax evasion, for starters, as well as elaborate legal schemes that funnel money not into the most productive uses, but into tax shelters that avoid the high marginal rates (by, say, reclassifying it as capital gains). Lots of laywers and bankers take their cut in these wasteful shelter shenanigans. If Obama really will hike the top rate into the 60% pre-Reagan range, as Krugman and the Tax Policy Center suggest, that's a big deal. And if 6-12 points of that 60% will come from Obama's Social Security hike, we'd better make sure we're getting something pretty important in exchange.
There's an alternative to raising Social Security taxes on the rich, after all. It's cutting Social Security benefits for the rich. The simplest way to do that is through a "means test"--people who were wealthy when they retired would have their benefits drastically cut. Maybe at the very top they'd get no benefits at all. The sums that could be saved through a means-test are staggering, hundreds of billions--money that, as Krugman notes, Obama will need for health care.
Means-testing wouldn't turn Social Security into welfare--again, because of the "work test." Social Security would become government insurance for workers against the possibility that they won't be very well-off in retirement! Yes, means-testing might undermine political support for the system, by violating the "contribution" model (nobody could even think they were getting their contributions back) and by altering the Crude Calculation so that those who confidently expected to be affluent would have little selfish reason to support the stystem. But--and here's the key point--Obama's already diluting or dispensing with those other two sources of support. He's fuzzing the Contributory Model. He's undermining the Crude Calclation. He can still rely on the work test--he can say, "Hey this is to help old folks who've worked all their lives," etc.. But as long as you're relying on the work test, why not rely on the work test to justify a more radical, more progressive and more lucrative reform of the system that would not just tax the rich but stop shelling out unneeded benefits to them.
There might be reasons. Maybe Obama feels it's politically easier to tax the rich than to cut their benefits. But it's not wildly obvious why this should be so. Both tax hikes and benefit cuts involve imposing economic harm. But (a) tax hikes are immediately felt by people of all ages. Benefit cuts impact most immediately only on the old. (b) High tax rates, as noted, have bad side effects that hurt the whole economy. Means-testing wouldn't have those effects (though it might have others, such as discouraging savings). (c) Means-testing could be sold as a shrinking of the program--as Ponnuru points out, why run lots of money through the system by taxing the rich in order to pay benefits to the rich?
The rich aren't uninfluential! At some point the people making $275,000 a year may wonder why they are paying an extra 10% of their last dollar to send a check to the couple down the street who make $240,000 but don't have to pay any of that extra 10% at all (because they're in the lucky doughnut hole)--or to the vastlyy more numerous couplee making $120,000 who would also get full benefits but pay no new tax to fund them At some point, the $275G plus crowd may say, "The hell with it. None of these folks in my neighborhood need the benefits. Just stop taxing us to pay for them"--and support means-testing.
I think you can argue Obama's opening the door to this outcome. Since I like the outcome, this doesn't bother me. Means-testing isn't necessary to keep Social Security solvent--the system's not that out of whack--but it might be necessary if you want to generate lots of money (in the form of budget saving) you could then spend on a decent universal health care plan. Orthodox Democrats who've rigidly opposed means-testing for decades might want to think twice about Obama's payroll tax plan, though.
**--But Obama would apparently offer low income workers a "Making Work Pay" tax credit in an amount equal to their "employee's" half of the payroll tax for the first $8,100 in income. ... 12:47 A.M. link
Monday, June 16, 2008
I See a Chair at the Annenberg School: Joe Conason responds to my suggestion of an on-the-record email (regarding his hypocritical condemnation of "revolting ... tabloid journalism" given his own 1992 Spy investigation of George H.W. Bush's sex life):
I just saw your item from last April
and finally realized that you don't just pretend to be a bonehead.