Simply stated, high tax rates drive a wedge between pre-tax income and post-tax consumption, and that reduces incentives to engage in productive behaviors such as work, saving, investment, and entrepreneurship.
At one point, there was even a bipartisan consensus in favor of lower rates. More than 70 percent of congressional Democrats voted for Reagan’s 1986 Tax Reform Act, which lowered the top tax rate from 50 percent to 28 percent.
Sadly, the consensus for pro-growth tax policy has eroded. Hard-left politicians in recent years have been advocating for class-warfare tax increases. Not just higher tax rates, but big increases in the double taxation of capital gains. Even wealth taxes.
What’s remarkable is that even some Republicans are now advocating for class-warfare tax policy.
Here are some excerpts from a column in yesterday’s New York Times by two politicians who want to increase America’s top tax rate by 12.4 percentage points.
One of them is Elizabeth Warren (hardly a surprise). What’s shocking, however, is that she somehow snookered Bernie Moreno, a supposed Republican from Ohio, into joining her class-warfare jihad.
Congress must act now to save Social Security for generations of Americans to come. …That starts with a common-sense solution: lifting the Social Security payroll tax cap. For 2026, the payroll tax cap, or taxable maximum, is $184,500. Workers and their employers each pay 6.2 percent on wages up to that amount. (Self-employed individuals pay 12.4 percent.) Today, the maximum Social Security withholding for one worker is $22,878, or 12.4 percent of $184,500. …Since the vast majority of Americans make less than that, most people are paying Social Security taxes on 100 percent of their earnings while the highest earners are paying on only part of theirs. Why should a middle-class nurse pay a larger share of her paycheck than a wealthy corporate lawyer? …eliminating the payroll tax cap would inject around $3 trillion into the program over the next 10 years. …extend the solvency of Social Security for another generation.
Before elaborating on why this is terrible tax policy, I can’t resist making two factual corrections.
First, employers are the ones who actually send payroll taxes to the government, but every labor economist agrees that workers bear the full 12.4 percent burden. So the Warren-Moreno tax hike isn’t split between workers and employers. All of it ultimately comes out of workers’ paychecks.
Second, the two leftist Senators want readers to think that the cap on taxable wages is some sort of mystery, but that was the policy from the beginning because President Roosevelt sold the program as being akin to insurance (the “FICA” tax that comes out of your paycheck to finance Social Security stands for “Federal Insurance Contributions Act”).
In a column for National Review, Ramesh Ponnuru echoes that second observation and makes several more important points.
… the Republican-Democratic duo talk up their plan to eliminate Social Security’s shortfall entirely through tax increases. A few things they didn’t have time to note: …The top federal tax rate would jump from 37 percent to 49.4 percent. …The top tax rate hasn’t risen that fast since the 1930s. …The senators feign (or maybe truly experience) bafflement at the idea that “a middle-class nurse pay[s] a larger share of her paycheck than a wealthy corporate lawyer” for Social Security. A few sentences later, they say how important it is to “safeguard Social Security’s earned-benefit structure.” They do not realize that the cap on Social Security taxes is part of that structure: Taxes are capped because benefits are. Having rich people pay more without getting higher benefits erodes that structure.
For those who want to understand the magnitude of the tax increase, here’s a tweet from the American Enterprise Institute’s Andrew Biggs.
How much incentive would you have to work harder or to invest more and take more risks if greedy politicians take nearly 68 percent of any wealth you generate for the economy?
Here’s another remarkable fact about the Warren-Moreno tax increase. As Jessica Riedl of Brookings explains, the enormous amount of damage would be imposed and it would only avert Social Security red ink for four years.
Let’s now check out another tweet from Andrew Biggs.
He notes that wage caps are normal. Indeed, the U.S. already has one of the highest.
Since I care about economic growth, let’s wrap up today’s column with two visuals from the Tax Foundation’s analysis.
We’ll start with the adverse impact on macroeconomic variables.
And here’s the impact on after-tax income for different segments of the population.
As you can see, everyone loses.
Though some leftists will look at this data and be happy since upper-income people are hurt more than lower-income people.
