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Mr. Obama’s Sugar-coated Doughnut

June 30, 2008

There are about 116 million households in the U.S. About 22 million of them have incomes over $100 thousand per year while only 2 million have incomes over $250 thousand. Many of those 20 million households in the 100-250K range are Obama voters. Mr. Obama doesn’t want to hit them with a huge tax increase. Hence the idea of the doughnut. The doughnut is a creative tax structure in which all taxpayers who earn under about $104,000 will pay standard social security taxes. Those who earn between $104,000 and $250,000 will pay taxes only on the first $104,000, and those who earn more than $250,0000 will pay taxes up to $104,000 and then on all dollars exceeding $250,000. It is a big tax increase with a nice doughnut hole right over about 17% of the electorate.

This policy is completely understandable in light of Mr. Obama’s positioning with the electorate, make the rich pay more but protect middle, and even upper-middle income voters from tax increases. But this policy is also going to back him into a rhetorical corner at some point in the campaign.

Is it reasonable to use Social Security taxes to fund a social welfare program? The word “welfare” here is political dynamite, particularly when applied to Social Security because from its inception it was clearly never intended as a welfare program. But if you require those who make over $250,000 to pay social security taxes on those dollars without adjusting their future payout schedule to reflect those increased contributions a welfare program is exactly what it is . Already some semi-official sounding Obama supporters have backed away from the notion that future payouts would not be adjusted to reflect increased contributions. But, if you do adjust future payment schedules that creates a liability on Social Security’s books that must be paid at some point in the future. How does that help the solvency of the system, as Mr. Obama claims this proposal does? That looks more like a shell game.

It is either the case that he expects richer Americans to contribute new monies that they will never receive in return as Social Security payments, a welfare program, or this is a policy that simply kicks the problem of solvency down the road. Even the middle ground, the rich pay more but only receive a portion of it back, will still (correctly) be labeled a welfare program. Turning Social Security into a welfare program is bad policy and it will ultimately prove to be bad politics for Mr. Obama. Social Security is not nearly as complicated as Medicare. It can be fixed with a few straightforward changes that would be fair to everyone. He doesn’t need this sugar-coated doughnut.

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One comment

  1. Yes to your comments about “Obama’s Doughnut Hole.” Those of us who have paid Social Security for years don’t want to be a welfare program. We certainly don’t want the over $250,000 people who already pay most of the taxes to be taxed again. One simple fix would be to raise the retirement age. Most of us are healthier and living longer.Most retired people are patriots despite the whining of AARP.



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