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Saturday, February 10, 2007

Tax Hike Coming?

Neil Cavuto and Michael Reagan had an interesting discussion yesterday on Fox News about the possibility of Bush agreeing to a tax increase on Social Security this year.

As opposed to an across the board increase, though, what is supposedly being floated by the House leadership is raising the maximum wage that social security taxes are paid on. Currently that amount is $97,500, and does move up slightly every year.

What wasn't clear was whether or not that would also bring an increase to the upper wage groups maximum benefit, as it has whenever the wage ceiling was raised before. That amount is $2116 per month right now.

I'm not sure Bush would actually go along with the idea, he wouldn't be the first President to raise taxes when he's safely away from worrying about re-election. In fact both Reagan and Clinton raised them in their second terms.

If he is thinking of this, as Cavuto suggests, then the ONLY way it should happen is if the extra money collected is used to test the idea of investment of a portion of the trust fund.

I would suggest that if he's going to do this, raise the maximum taxable income to $22,500 above the current ceiling; making $120,000 the new threshhold. However, all taxes collected from that group be invested in the Thrift Savings Plan's (TSP) most conservative non-treasury option, the F Fund, which is a bond fund with a good historical earning (5.9% in the last 5 years).

Why pick a TSP fund? Well two reasons, the government already runs it, so it wouldn't incur a huge amount of extra beaurocrats to start the experiment. Secondly, if Democrats balk about it being too risky one could ask them why it's trusted with all the federal employee's retirement benefits.

If the amount was too much for just the "F" Fund, then a portion could be moved to other funds, except the G Fund, which is a fund of government issued bonds. The problem with the current Social Security ponzi scheme is that excess money is already tied up in government bonds. In other words the government shouldn't be buying bonds from itself, since then it has to repay them, with interest.

The term of the tax hike, like the current tax cuts, should be limited to 5 years, and then require reauthorization with full debate. Why? Because after five years, when it's seen that the invested portion of Social Security is actually making money, instead of incurring debt, and that the interest earned is moving the solvency date out from the current 2042, it will be hard to stop the idea of investing other excess Social Security funds.

Using the 5 year average of the F Fund (5.9%), if the government put $1 billion of that new tax into the fund this year, and added $1 billion per year until 2042 (when SS starts running deficits), they would have accrued over $127 billion, 92 billion of it in earnings. ( I used American Century Investments Time Value calculator to come up with the numbers)

Any deal that doesn't include investing at least a majority portion of the extra taxes raised should be ignored by the President.

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