Sunday, April 20, 2008

Kudlow on the Cap

Larry Kudlow comments on Barack Obama's plan to increase the Social Security payroll tax cap:

Uncapping the payroll tax reveals still another cultural misstep by Sen. Obama. He apparently has a difficult time understanding that nowadays, a veteran fireman or a veteran cop, married to a veteran schoolteacher, will make well over $100,000. In fact, they can make close to $200,000. Yet Obama still wants to go ahead and tax both the first and last payroll dollar of this group at a very high marginal tax rate by uncapping the Social Security (FICA) tax.
A couple thoughts:

First, in fairness to Obama, he has said that while he would eliminate the payroll tax cap, we would create a "donut hole" exempting earnings between $100,000 and $200-$250,000. So while he was challenged in the Philadelphia debate that his Social Security plan would raise taxes on individuals earning under $250,000, his Social Security plan would not do so. (Whether he could sustain the exemption is another story.)

Second, Kudlow implies that payroll taxes are levied on the combined income of a married couple, as ordinary income taxes are. In fact, both Social Security and Medicare taxes are paid on a purely individual basis. This can lead to inequities, of course: households with the same earnings may pay different taxes depending on how the earnings are distributed between spouses.

Under current law, for instance, a couple would MUCH rather have a single spouse earning $200,000 than both spouses earnings $100,000 each. Why? On the tax end, the single earner couple would pay 6.2% of their joint $200,000 earnings in Social Security taxes, while the dual-earner couple would pay 12.4%. Moreover, at retirement the non-working spouse in the single earner couple would be eligible to a spousal benefit equal to half the working spouse's. So the single-earner couple pays half the taxes of the dual-earner couple, despite having the same earnings, and receives 3/4 of the benefits. In other words, the single earner couple receives 50% more benefits for its tax dollar than the dual-earner couple. Just another example of quirky redistribution under the Social Security tax/benefit formula...


Anonymous said...

Why should it matter what occupation the person is in? Why should we care if a person earning more money than 94% of the population is a teacher or an actor or a professional juggler?.

Of course we don't, this is Kudlow (and HClinton, whose comments he is parroting) demagoging. (As well as being misleading in the ways Andrew described).

Andrew G. Biggs said...

A good point. Citing the occupation makes some illustrative sense IF the occupation's typical wage would make it subject to higher taxes. But there's no way a typical firefighter or teacher is making more than $102,000, much less more than the $200k-$250k where Obama would start raising taxes. I'm no fan of Obama's plan, but this is a cheap shot against him.

Anonymous said...

raising the cap would be a bad idea. currently a person earning at the cap his whole life can expect to get back all of his money adjusted for inflation and rise in average wages. with a raise in the cap some people would be essentially paying a welfare tax.

the fact that they already think they are is just another little problem.

AND there is no need. Social Security doesn't need the money.

coberly... not the anonymous above