Martin Feldstein, Harvard Professor and a chariman of the Council of Economic Advisors in the Reagan administration, argues on the editorial page of today's Wall Street Journal that the Kerry proposal to raise the ceiling on income subject to the Social Security payroll tax could actually result in lower revenues. Some highlights:
[Senator Kerry speaks] about raising the maximum amount of income on which the 12.4% Social Security tax would be levied from the current $87,900 to $120,000...
Here are the specifics. For taxpayers now earning between $87,900 and $120,000, the overall marginal tax rate (including the federal marginal income tax rate of 25%, the Medicare payroll tax and a state income tax) would rise from about 33% to about 43%. Experience with past tax changes suggests that raising the marginal tax rate from 33% to 43% would cause individuals to reduce their taxable earnings by 7% by changing the way they work and the way that they are compensated...
This reduction in taxable earnings not only reduces the revenue gain from raising the payroll tax ceiling but also causes an outright loss to the government of personal income tax revenue. For many individuals, the extra payroll tax revenue would be more than offset by the lower personal income tax revenue, causing a net loss of revenue to the government.
Feldstein goes on to add up the full set of revenue gains and losses, based on the results of his own research. He concludes that the proposed policy would net "nearly a $3 cost to taxpayers for every extra a dollar of revenue that the government collects."
That sounds pretty bad, but now it's time for...
The Fair and Balanced Section
You may have noticed that Alan Greenspan was all over the news early this week for comments he made about the need for Social Security reforms, like pronto. Here for instance, was Monday's report from the Chicago Sun Times (www.suntimes.com/output/business/cst-fin-greensp28.html).
Federal Reserve Chairman Alan Greenspan said Friday that the country will face ''abrupt and painful'' choices if Congress does not move quickly to trim the Social Security and Medicare benefits that have been promised to the baby boom generation.
If you buy Greenspan's assertion that a fix is inevitable (and imperative), then it takes a plan to beat a plan. And there are several on the table:
Greenspan, as he has done previously, suggested that one possible fix would be again raising the retirement age to receive full Social Security benefits, which is being gradually increased to 67 from 65.
President Bush favors giving younger workers the option of putting part of their payroll tax into personal retirement accounts, in return for smaller Social Security benefits or staying with the Social Security system.
Sen. John Kerry opposes that plan for partial privatization. He said the way to strengthen Social Security is to ''grow the economy, create jobs and increase revenues into the program.''
Feldstein has few ideas too. Stay tuned.