President Bush’s willingness to tackle the problems of a bleeding Social Security system is welcome. But already the naysayers and the game players are chipping away at the momentum toward reform.
Their rallying cry? Transition costs. They argue that the cost letting workers keep part of their payroll taxes to invest in personal accounts will cost $2 trillion – maybe more. And it’s true that the transition costs will not be insignificant. But some Republicans are talking about raising taxes to meet these costs.
Sen. Lindsay Graham, R-S.C., for one, says that Republicans need to consider raising payroll taxes on all workers making more than $87,900. That’s the level at which Social Security taxes stop being assessed. Graham told conservative columnist Robert Novak that raising the taxable income level to $200,000 would pay for the transition costs in 10 years and attract Democrats to the cause. Novak ended his column on the matter with this pronouncement: “His bargain would be painful for both sides, but nobody else has an idea with a chance to succeed.”
But as the data have shown over the past century, high taxes impede economic growth. And economic growth is the single biggest reason revenues increase.
Even more to the point, as IPI Senior Fellow Peter Ferrara has pointed out, a lot of the transition costs disappear if the amount invested in these personal retirement accounts is large enough. The resulting explosion in economic growth from the expanded pool of investment capital would throw off revenues right and left.
If this boogieman of transition costs stifles reform, all Americans will face paying for a system that will go broke in about three decades. The non-transition costs amount to $11 trillion, maybe more.
Lawmakers should see that doing nothing is not an option. But even worse, raising taxes to do something is not fixing the problem, it’s creating a bigger one.