A Stitch in Haste

Barack Obama has, as was widely expected, introduced a proposal to lift the cap on wages subject to Social Security tax, but with an exemption — often referred to as a “donut hole,” for wages between the current cap (set for now at $102,000) and $250,000 (i.e., anyone making less than $250,000 per year would see no increase in their Social Security taxes from the Obama proposal).

The details from the Obama campaign are sketchy at best. Many questions have yet to be addressed:

–Will Obama openly credit and praise Republican Senator Lindsey Graham, an outspoken supporter and defender of John McCain, for first conceiving the “Donut Hole” approach to raising Social Security taxes?

–Will the upper bound of the donut hole, initially to be set at $250,000, be automatically increased each year in the same way that the lower bound (i.e., the current wage cap framework) is automatically increased, or will the donut hole compress over time and eventually vanish?

–Will the additional taxes paid by those earning above the donut hole earn them additional Social Security benefits upon retirement? If so, then how does it really fix anything? If not, then what is the moral justification for it?

–Stated differently, does Obama consider Social Security to be a form of “forced retirement saving” or simply another form of progressive income redistribution with an intergenerational overlay?

–Will employers be expected to go through the hassle of performing the complicated payroll arithmetic required by the donut hole, or will they be allowed to simply assess FICA taxes on an employee’s entire paycheck, with the employee then reclaiming the assessed donut hole taxes, after the fact, on her federal income tax return?

–Since the Social Security “trust fund” contains no true assets and is merely a promise by the federal government to raise either taxes or the budget deficit beginning on or around 2017, which does Obama prefer from a policy perspective, and why?

–According to this analysis (summarized nicely here), over 85% of the taxpayers who would be subject to the new, higher taxes are concentrated in ten states. Does Obama consider this wise from an economic perspective? Does he consider it fair and proper from a moral perspective?

–Additionally, the eight states with the highest concentration of affected taxpayers are generally considered “Democratic” (e.g., New York, New Jersey and Illinois). Did Obama consult with the senators and representatives of those disproportionately affected states — especially senior Democrats such as Chuck Schumer, Frank Lautenberg, Charlie Rangel, his Illinois colleague Dick Durbin (or, ahem, Hillary Clinton) — before announcing his plan?

–If Obama considers what could be one of the largest tax increases in American history to be “paying a little bit more” — then what pray tell would he consider to be “paying a lot more”?

Filed under: Politics, Social Security