A Bush Tax Increase?

By Robert D. Novak
Townhall.com

WASHINGTON - More than the ascension of Nancy Pelosi & Co.
was disturbing congressional Republicans last week. They
worried that George W. Bush may proceed down the same path
that made his father a one-term president. Thus, they ask
this question: Will the current President Bush embrace a
tax increase that would produce potential economic disaster
and guaranteed political catastrophe?

Henry M. Paulson Jr. is a shark on Wall Street but a rookie
on Pennsylvania Avenue. As Bush's third secretary of the
Treasury, he has engaged in secret bipartisan talks
discussing an increase in the current $97,500 limit on
personal income subject to the Social Security payroll tax.
That would spike up the top marginal tax rate, demolishing
supply-side tax principles that Republican administrations
have purportedly followed for 26 years.

Paulson certainly has given the impression in those
discussions that he is amenable to raising the payroll tax,
but a senior White House aide cautions this decision has
not yet been made. "There is somebody higher than Hank
Paulson, and it is George W. Bush," he told me. Presidential
adviser Karl Rove (who was not the aide I just quoted)
attended conservative activist Grover Norquist's weekly
meeting last Wednesday and offered to bet anyone $5 that
there would be no increase in the payroll tax base. But
Bush himself has not unequivocally ruled out such a move,
as he has in rejecting any increase in the personal income
tax.

White House spokesman Tony Snow, an ardent supply-sider as
a columnist and commentator who must be personally against
a higher payroll tax, dances around the question in public
briefings. Congressional Republicans are running into a
stone wall from usually cooperative Treasury and Social
Security administration officials when they request
economic data that would demonstrate the folly of lifting
the payroll cap.

But Paulson is the source of most Republican apprehension.

He has engaged in private talks with Republican Sen.
Lindsey Graham of South Carolina and Sen. Joseph Lieberman
of Connecticut, who now calls himself an "Independent
Democrat." Graham for more than two years has been seeking
Lieberman's participation in a bipartisan Social Security
reform that includes a higher payroll tax base.

When Graham began crafting his compromise in November 2004,
the premise was that each party would accept something
painful. In return for Republicans agreeing to payroll
taxes on higher income, Democrats would have to swallow
Bush's proposed personal retirement accounts, which would
be financed by cutting into payroll taxes that now all go
into Social Security. But no Democrat, not even Lieberman,
is willing to accept that. Democrats refuse to talk with
Republicans about personal accounts "carved out" of the
present system.

Indeed, a "carve out" is now a dead letter. New personal
retirement accounts could be passed only as an "add on"
-- financed voluntarily by individuals whose contributions
to Social Security would remain unchanged. Higher payroll
taxes would be imposed only to save the present system as
part of a broader entitlement reform.

Republican concern over such an outcome stems in no small
part from the belief that multi-millionaire Paulson has
entered a realm foreign to him. One well-placed House
Republican, asking that his name not be used, expressed
alarm that a financier who sold $485 million worth of
Goldman Sachs stock in order to be confirmed at the
Treasury cannot appreciate how the payroll tax ravages
self-employed businessmen and farmers.

Eliminating the cap on payroll taxes would constitute the
largest tax increase in U.S. history, estimated by the
Heritage Foundation during the last Congress at $1.4
trillion over 10 years. This analysis predicted that such
a step would cost nearly a million jobs and more than $55
billion in projected personal savings.

The economic woe resulting from higher payroll taxes would
be matched by political damage to the president if this
outcome were adopted by the Democratic-controlled Congress
with his approval but support from only a few Republican
legislators. That political calamity can be averted if
Bush takes any payroll tax increase off the negotiating
table, just as Democrats refuse to talk about a partially
privatized Social Security system.