Trump Loses the Tax Cut Plot

Ending taxes on Social Security benefits would kill the chance of renewing his 2017 reform

WSJ editorial. 

"Does anybody in politics understand tax policy these days? The Biden-Harris Democrats want to raise tax rates to Thomas Piketty French socialist levels. Republicans want to cut taxes, but they want to do so for specific groups to buy their votes. They’ve all lost the growth plot. 

Mr. Trump’s tax fumbling is especially disappointing because his 2017 cut in tax rates was the policy foundation for the strong pre-pandemic U.S. economy. But so far in this campaign he’s proposing hugely expensive tax cuts for different voting groups that won’t do much for growth.

We’ve written about his promise not to tax tipped income. Then last week he averred on Truth Social that “SENIORS SHOULD NOT PAY TAX ON SOCIAL SECURITY!” He needs to win the senior vote against Kamala Harris by a large margin, so he’s going right for their pocket book. We favor lower taxes as a matter of principle, but not all tax cuts have equal benefit. And this one is likely to backfire in spectacular fiscal and economic ways.

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Social Security benefits weren’t taxed until 1983 when the Greenspan Commission recommended the idea to shore up the program’s dwindling finances. Congress moved to require beneficiaries with more than $25,000 in income to pay tax on up to 50% of their benefits. Ten years later Congress did it again by taxing an additional 35% of Social Security benefits for seniors with income above $34,000.

Taxing benefits is expected to raise $94 billion this year for the Treasury. But here’s a fiscal twist. Social Security benefits are indexed for inflation each year, but the income thresholds for taxing benefits aren’t. This means that taxing benefits will raise much more revenue over time as inflation boosts Social Security payments and retirement distributions. Taxing benefits is projected to raise between $1.6 trillion and $1.8 trillion over 10 years.

That’s a big tax cut—larger even than the static-revenue cost of Mr. Trump’s 2017 reform. Yet unlike that reform, it would provide little economic bang for the buck. Corporate tax reform encouraged more investment and savings that led to higher productivity and living standards. A Social Security benefit tax cut is essentially an increase in benefits by another name.

As an economic incentive, it is arguably anti-growth. At the margin it could induce seniors to retire earlier than they otherwise would since they would have to keep paying income tax on wages but not on benefits. A smaller workforce would be a drag on growth.

There’s also a matter of inter-generational fairness. Eliminating the tax on benefits is an income transfer to seniors who have been able to accumulate assets across their life spans. Thanks to Congress’s changes over the years, seniors today receive more in benefits than they contributed in payroll taxes. The least needy generation would benefit from a net income transfer from the young.

It also isn’t clear how Mr. Trump would finance this special tax carve-out. He doesn’t say, but Democrats have some ideas. House Democrats have already proposed legislation that would do so by subjecting wage income of all workers above $250,000 to the 12.4% payroll tax. Currently employees and employers each pay 6.2% on wages up to $168,600, so the Democratic plan would amount to a 12.4% increase in the marginal tax rate—which would hurt incentives to work.

The Social Security tax exemption is so costly in foregone revenue that it would be almost impossible to extend the rest of Mr. Trump’s 2017 tax rates when they expire at the end of 2025. Congress—including the J.D. Vance Republicans—might raise corporate and personal tax rates to pay for it. This would be another growth killer.

Mr. Trump has ruled out reforming Social Security and Medicare. And his tax proposal would run headlong into the looming insolvency of the Social Security and Medicare trust funds. Revenue from the tax on benefits is shared between the two trust funds. And while they are accounting fictions because Congress spends the tax revenue now, insolvency expected in 2033 (Social Security) and 2036 (Medicare) would trigger benefit cuts.

Democrats might accuse Mr. Trump of jeopardizing benefits to give a big tax cut to himself and other affluent seniors. They’ll take his idea, stop taxing benefits for middle-class seniors, and then raise taxes on others to make up the difference.

No doubt ending taxes on benefits will sound good at first to many voters, but it’s counterproductive tax policy. If the former President wants to appeal to seniors, he could talk about how the Biden Administration is slashing payments to Medicare Advantage plans, leading to higher premiums and reduced benefits. Or he could mention that the Inflation Reduction Act’s drug benefit redesign will cause Medicare Part D premiums to rise.

Mr. Trump’s first-term economic record is one of his major advantages over Kamala Harris, but that edge was achieved with pro-growth tax policy. His current brainstorms are giving that advantage away."