The most newsworthy exchange in the most recent Democratic presidential debate was one that didn’t get a lot of attention.
It came when Bernie Sanders challenged Hillary Clinton to join him in promising to apply the Social Security payroll tax to income more than $250,000 a year.
Clinton replied, “I think it's fair to say we don't have a disagreement. We both believe there has to be more money going into the Social Security system. I’ve said I'm looking at a couple of different ways, one which you mentioned, Senator, but also trying to expand the existing tax to passive income that wealthy people have so that we do get more revenue into the Social Security Trust Fund.”
Se. Sanders pressed the issue, and Clinton replied, “I'm going to come up with the best way forward. We're going to end up in the same place. We're going to get more revenue.”
There are two pieces of Clinton’s answer to watch: the timing and the tax.
The timing is the priceless part. Clinton has been running for president for years. She announced her plan to increase capital gains taxes back in July of 2015, and she’s been rolling out policy specifics for a long time now. But when it comes to this particular tax increase, she’s avoided leveling with voters until her opponent dragged it out of her on the debate stage. Even then, she was talking about it as if it was something down the road — she’s “looking at” it, she’s “going to come up with” something.
Republican and even centrist budget hawks will no doubt welcome her to the fight for entitlement reform. Implicit in her call for a change to Social Security funding is an acknowledgement that, without changes, the program is not economically sustainable.
Less welcome, though, are the specifics of her tax increase plan, which probably has a lot to do with why she has been obscuring it from voters. In fact, had it not been for the unexpectedly strong primary challenge from Sanders, Clinton might have made it all the way through the general election without disclosing this particular tax increase.
As background, the current Social Security tax for the Old-Age, Survivors, and Disability Insurance program is 12.4 percent on wages up to $118,500. Half is paid by the employee and half by the employer, but economists tend to characterize even the half paid by the employer as being actually borne by the employee.
And Clinton has already proposed a 4 percent surcharge on high-income taxpayers, bringing the top marginal income tax rate to 43.6 percent. Slapping a 12.4 percent payroll tax on top of that would bring the top marginal federal income tax rate to 56 percent, meaning the federal government would take away more than half of every additional dollar that a high-income family earned. Add in state and local income taxes — 13.3 percent in California and 12.7 percent in New York City — and personal income taxation reaches a confiscatory 69 percent, or more than two thirds of every marginal dollar.
Nor is Clinton’s idea of expanding the Social Security payroll tax to “passive” income such as dividends or capital gains any better. She’s already proposed a “Buffett tax” and increases in the medium-term capital gains tax that would hurt American competitiveness, add complexity to an already Byzantine tax code, and lower the rewards for savings and investment.
Adding a 12.4 percent payroll tax to a 30 percent Buffett tax or to Clinton’s proposed capital gains tax of 47.4 percent on would bring taxes on savings and investment to levels that are punitively high and uncompetitive when compared with alternative jurisdictions overseas.
It’s no wonder that Clinton hadn’t deigned to tell voters about this under Sanders dragged it out of her in a debate. She might have been willing to let it slip on the theory than most voters earn less than $250,000 a year and thus wouldn’t have to worry about those tax increases.
That’s Sanders’ soak-the-rich socialist political theory. Alas, by having those lower income voters impose taxes on the upper income voters, Clinton risks not only hurting economic growth and job creation, but also violating the ideas about taxation without representation and consent of the governed that were at the center of America’s founding.
Back in 2008, Barack Obama campaigned promising not to raise “any form” of taxes on families earning less than $250,000 a year. It’s a promise he swiftly broke once elected. Those tempted to support Clinton on the basis that her tax increases won’t touch them may want to keep that precedent in mind.
As Republicans like to remind voters, when Democratic politicians run promising to raise taxes, that is one promise you can be sure they are going to keep.
Ira Stoll is editor of FutureOfCapitalism.com and author of "JFK, Conservative." Read more reports from Ira Stoll — Click Here Now.