[T]he new low rates in payroll taxes for every American household, from 6.2 percent in 2010 to 3.1 percent in 2012, won’t suddenly evaporate at the end of 2012; they will become permanent almost inevitably, shrinking revenues not by $240 billion in a single year but by at least $2.4 trillion over 10 years.But I say: Bring It On.
The current payroll tax, falling heaviest on wage earners, is part of the system of political defense in depth for Social Security and Medicare. It preserves the illusion, promulgated first by FDR and believed by many Americans, that Social Security and Medicare are insurance programs. I paid into the trust fund, Americans say, so I got my benefits coming.
But if politicians cut the tax so that it clearly is no longer funding Social Security properly, then the inconvenient truth starts to emerge, that Social Security is really a welfare program. Then, of course, the sacred aura surrounding the program starts to fade away. People might start to say: how come those Latinos down in Chile got a genuine savings program and we just have this joke of a welfare program?
Yeah. Let's raise income tax rates. Let's screw the rich. But the problem is that US tax rates are already pretty high by international standards. If we make them higher then people are going to start serious tax avoidance, and maybe even move to more friendly tax regimes. And the higher you make the rates, the more that it pays people to pay politicians to carve out crony capitalist exemptions and deductions.
And there is another reason. One of the ways that Democrats prospered in the 2000s was that the professional middle class was doing well, tax wise. Taxes on wages were moderate, and tax rates on capital were reduced. The result was that upper-income people did not need the Republicans to represent their interest and started to dwell more on the embarrassing religious enthusiasm of the downmarket social conservatives.
President Obama's interest in taxing the wannabe rich is going to concentrate the minds of the "economically conservative, socially liberal" educated professional classes. And that won't add up to votes for our Democratic friends.