When Graham began crafting his compromise in November 2004, the premise was that each party would accept something painful. In return for Republicans agreeing to payroll taxes on higher income, Democrats would have to swallow Bush's proposed personal retirement accounts, which would be financed by cutting into payroll taxes that now all go into Social Security. But no Democrat, not even Lieberman, is willing to accept that. Democrats refuse to talk with Republicans about personal accounts "carved out" of the present system.
Indeed, a "carve out" is now a dead letter. New personal retirement accounts could be passed only as an "add on" -- financed voluntarily by individuals whose contributions to Social Security would remain unchanged. Higher payroll taxes would be imposed only to save the present system as part of a broader entitlement reform.
Republican concern over such an outcome stems in no small part from the belief that multi-millionaire Paulson has entered a realm foreign to him. One well-placed House Republican, asking that his name not be used, expressed alarm that a financier who sold $485 million worth of Goldman Sachs stock in order to be confirmed at the Treasury cannot appreciate how the payroll tax ravages self-employed businessmen and farmers.
Eliminating the cap on payroll taxes would constitute the largest tax increase in U.S. history, estimated by the Heritage Foundation during the last Congress at $1.4 trillion over 10 years. This analysis predicted that such a step would cost nearly a million jobs and more than $55 billion in projected personal savings.
The economic woe resulting from higher payroll taxes would be matched by political damage to the president if this outcome were adopted by the Democratic-controlled Congress with his approval but support from only a few Republican legislators. That political calamity can be averted if Bush takes any payroll tax increase off the negotiating table, just as Democrats refuse to talk about a partially privatized Social Security system.
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Note: Aides to newly elected Democratic Sen. Jon Tester of Montana say this column last week incorrectly referred to him as pro-life when in fact he is pro-choice.