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Amity Shlaes: The Next Big Tax Hike

Don’t lift the Social Security cap. Before 2016 is out, they’ll lift this cap.

That’s my prediction about the future of a rarely considered feature of the payroll tax, the “wage base limit.” This magic number, $117,000 for 2014, is the amount of earnings at which American employees cease to pay their 6.2 percent in Social Security taxes. Employers stop paying their 6.2 percent share at that point at well.

The effective capping of Social Security taxes confers significant benefits. At that key $117,000 point — the precise rate moves up or down with average real wages — workers automatically see their marginal tax rate drop by that 6.2 percent, 12.4 percent if you count the employer side. Suddenly everything seems easier. The experience is similar to finding a second wind in a ten-mile race. You never thought you could get past six miles, but then you never knew the last four miles could be so easy.

The question at this point might be: How did such an assailable policy even survive until 2014? After all, the rich are the ones who benefit, mostly white, mostly male. Nor have devices like the cap survived even in more wealth-friendly periods. A similar cap on Medicare levies was blown in 1994, as a sad little footnote in the Tax Foundation chart on payroll taxes reminds us.

The best explanation for the Social Security cap’s survival is ignorance. Few people knew about it — especially not the sort of people who craft international tax harmonization at World Bank conferences. What Eurobankers don’t know about, they can’t advise Congress to take away. And what congressmen and women don’t know about, they don’t push to change. Sometimes, prosperity makes the progressives forget all about their progressive projects: Think of how tame the Democrats were in President Bill Clinton’s second term, when, working with Republican leaders, they even went along with a reduction in the capital-gains tax.

Once upon a time we could tell ourselves that Social Security truly was insurance, just as President Roosevelt said it was. The logic of the cap reinforces that idea of contract: Since you cease to receive increases in your Social Security pension after a certain point, you should cease to pay in after a certain point as well. What you get out has some relation, however tenuous, to what you pay in.

Those who run the numbers on Social Security will know that, even at this late date, it’s possible to reform the program without giving up the notion of contract. You and I could rewrite the program sitting together over an afternoon and still keep the contract bit in the New Deal program. New immigrants with skills can bring in extra cash to make up some of the shortfalls. Pension payments could be pegged to inflation, rather than inflation and growth. Take these two steps and you zero out most of the future deficits.

What’s more important is the effect of a marginal tax increase upon a nation whose professionals already shoulder heavier loads than in the past. Just at a time when Americans want to finish the race to recovery, they won’t find that second wind.

But, alas, the cap secret is out. An alarmingly large entry on the “wage base” has popped up on Wikipedia. The entry reflects a Washington whose politicians are already aching to remove the cap. Even conservatives are showing signs of giving in, as per Daily Caller columnist Mytheos Holt’s allowance that a tweak” to the cap, raising the cap point a bit, might be acceptable.

The other day I met a subdued European economist at a conference on income inequality. Of all the topics we heard about at an evening lecture, the one that claimed his attention was the cap. Its existence was new to him. Carefully, the man thought it all over: Lifting this little cap would provide extra revenue for any U.S. reform. Lifting this cap would allow America to give the greatest single poke to the rich they’d delivered in years.

The economist brightened up with terrifying alacrity. The find of the conference was, for him, this cap. And his views matter because these days our leaders actually do heed foreigners — think of the blitz fame of Thomas Piketty of France. There’s also a pity factor that drives enthusiasm for cap removal. All commentators are feeling solicitous of young people, whose retirement the long-term shortfalls of Social Security funds will certainly affect. To be against lifting the cap is to be anti-millennial.

But one can also argue that to be pro-cap is to be pro-millennial. After all, it will not be pleasant to age in a society where the public sector never honors contracts. And it will be likewise unpleasant to age in a place where you work harder for (incrementally) less gain than you expected. While most young workers don’t study Social Security’s minutiae, the successful among them will notice when their take-home pay goes down by 12.4 cents per extra dollar. The rest, who earn well below that $117,000, will get a discouraging message: This race never gets easier. The cap should stay where it is precisely because of millennials — and for a millennium.

— Amity Shlaes chairs the board of the Calvin Coolidge Presidential Foundation.

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Posted: May 2, 2014 Friday 12:00 PM