Don’t Expand Payroll Taxes for Social Security

In his column “Republicans’ Pre-Emptive Social Security Surrender” (Political Economics, Sept. 18), Joseph C. Sternberg makes a persuasive argument against expanding payroll taxes to cover higher incomes as a way to solve Social Security’s financing crunch, aptly explaining the complicated trade-offs involved. But he only scratches the surface when he describes the damage higher payroll taxes could do.

While Mr. Sternberg focuses on the effect higher tax rates might have on work incentives, it also matters how the high earners who would be taxed would otherwise allocate that money. For example, higher earners are much more likely to save for retirement using private investments. Private investments generate higher returns than the Social Security formula and help finance businesses and long-term economic growth.

Further, if the payroll tax cap were lifted, the additional tax would fall statutorily on both employees and companies. Companies might respond to the increased labor costs by reducing labor costs in other areas. A very tempting target would be their 401(k) matching contributions. After all, employees would be eligible for additional Social Security benefits.

Read the full article at The Wall Street Journal.