Broaden the Base and Lower the Rate

The Romney/Ryan tax plan calls for lower tax rates. They argue that the plan is going to be at least close to revenue neutral due to some unspecified base broadening. I’ll leave that as stated.

My question is, if this is such a good idea, why not pursue the same sort of base broadening plan with Social Security/Medicare. Combined FICA taxes are 15.3% when you include both employer and employee contributions (and ignore the temporary payroll tax decrease). In 2010, this generated $781.1B in revenue (2011 report). The big catch with these taxes are they are regressive. Dollar earned beyond $108,000 are not taxed. If we broadened the base (taxed those earnings) we could substantially lower the rate.

A quick calculation: if we just stuck to wages we could lower the rate to 9.83% (based on BEA compensation data). If we widened it to include non-wage income (i.e. capital gains) the rate could be dropped all the way down to 6.02% (based on BEA personal income data).

It would seem that this proposal would appeal to the Romney/Ryan idea of broadening the base and lowering the tax rate, while appealing to the Democratic idea of soaking the rich. Why then is it not even being discussed?

Note: The reason it historically has not been discussed is SS/Medicare was not supposed to be a “entitlement”. It was a designed as pay in / pay out system, where benefits were not means-tested and contributions were not regressive. I think since we’ve been calling them entitlement programs, and thinking about them as such for quite some time we should make the move to structure them that way.

UPDATE (9/26): My post was a bit hasty. I corrected Medicaid to Medicare. However, I realized that Medicare is not actually subject to income restrictions (only SS is), and the revenue number I quoted was only for Social Security anyway. Here is the redone, back of the envelope calculation, with some additional  notes:

Excluding Medicare, the current tax rate is 12.4% (combined employee and employer). The rates with the broader base are the same at 9.8% and 6.0% – and the tax reductions for each would be 2.6% or 6.4%. For the median worker ($50,054 p31), these two plans represent increases of $3,200 and $1,275 respectively. To put this in perspective, between 1967 and today (45 years) median income rose about $8,000.

Gas is Still Too Cheap

Yesterday, for the first time, I spent more than $50 to fill my tank of gas. I do not have a particularly big car (it’s a Subaru Legacy), but a combination of a very empty tank and more expensive gas than usual (was $0.13 cheaper this morning, burn!) caused my to set the record.

The president and Detroit recently agreed to raise the fuel economy standards. Eduardo Porter has a great piece in the New York Times demonstrating why this is a poor strategy. If we want less of something (gas usage) we need to make that more expensive (tax it).

in Britain, where gas and diesel are taxed at $3.95 a gallon, the American automaker Ford sells a compact Fiesta model that will go nearly 72 miles on a gallon. In the United States, where gas taxes average 49 cents, Ford’s Fiestas will carry you only 33 miles on a gallon of gas.