The Wall Street Journal has an article today that runs under the headline "Pay of Top Earners Erodes Social Security" and begins with the claim, "The nation's wealth gap is widening amid an uproar about lofty pay packages in the financial sector." There are so many unstated false assumptions in this article that it is difficult to enumerate them all, but, for starters, the article's most recent data is for 2007. Since then, there has been a major financial downturn that has led to a lot of financial-sector pay packages being either nonexistent or significantly less lofty. What that meant for the "wealth gap," a term the article seems to mean the same as an "income gap,' is unclear, but in past downturns, the income gap has often narrowed. The "uproar" the article refers to is largely manufactured; to the extent that there is an uproar over financial-sector pay at this point, it reflects mainly not outrage at pay levels but outrage at the federal bailout, the feeling being that those rescued by taxpayers should not be paid so highly.
The biggest spin comes in the article's implicit argument for increasing the ceiling, or cap, on the amount of wages that are subject to Social Security payroll tax. The article says, "As executive pay has increased, the percentage of wages subject to payroll taxes has shrunk, to 83% from 90% in 1982. Compensation that isn't subject to the portion of payroll tax that funds old-age benefits now represents foregone revenue of $115 billion a year." The "foregone revenue" formulation suggests that the money really ought to belong to the government. An alternative way to frame, a way that is foregone by the Journal, would be to say that if the cap were lifted, individuals and the private sector would forego $115 billion in money that they earned and see it go to instead to the government — with no concomitant increase in the Social Security benefits of those high earners. The effect would be to turn what is supposed to be a social-insurance safety net into a redistributionist scheme. Another question is why 1982 should be used by the Journal as the baseline. That was the tail end of a downturn or the very beginning of an upturn, while 2007 was the top of an expansion. Why not pick, say, 1966, when Social Security payroll taxes only applied to the first $6,600 of wage income? The Journal article gives the percentage of income that was subject to the Social Security wage base in 1982, but it does not give the actual amount of the ceiling in that year. It was $32,400, compared to $106,800 in 2009. In other words, the level of income subject to this tax has more than tripled over the period, and the Journal is focused instead on the seven percentage point decrease and the foregone federal revenue.
There are no government officials or politicians or academics or think-tank analysts or interest group representatives quoted in the Journal article, which is presented as "a Wall Street Journal analysis of Social Security Administration data." Some analysis. Had some of them been quoted, they might have pointed out that adding payroll taxes to the tax increases on the "rich" already approved by a House committee to pay for health care would bring the top marginal rates in many places to well above 60%, even approaching 70%. Those are levels at which people start to do extreme things, such as renounce their citizenship, retire, or pay lawyers and accountants to devise complicated tax shelters, to avoid paying.