The Hidden Trap in Biden’s Tax Hike

Joe Biden speaks at a campaign stop in Cincinnati, Oct. 12.

Photo: tom brenner/Reuters

Joe Biden promises not to raise taxes on Americans earning more than $400,000—but there’s a hitch. It lies in his proposal to apply the Social Security payroll tax to income above that amount.

Social Security is financed by a 12.4% levy on earnings up to $137,700. Although nearly every developed country caps its pension taxes, progressives grumble that the rich don’t pay enough. Mr. Biden’s Social Security plan, analyzed this month by the progressive-leaning Urban Institute, would retain the $137,700 payroll-tax ceiling but impose the 12.4% tax on earnings above $400,000.

This “doughnut hole” would spare the upper middle class from higher taxes. But only temporarily. With each passing year, the doughnut hole shrinks. The payroll-tax ceiling already increases annually with nominal wage growth. But Mr. Biden’s $400,000 threshold isn’t indexed. This means that over about three decades, the payroll-tax ceiling would be phased out.

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High earners would be hit immediately with an effective tax increase of 12.4% of their wages. A New York City resident earning $400,000 would see his effective tax rate rise from 48% of each dollar of additional earnings to more than 60%, exceeding the top marginal rate in nearly every developed country.

But with time and wage growth, the Biden plan would raise the tax for employees earning above $137,700 by the same 12.4% of income. The Urban Institute analysis shows that over the long term, the tax increase on employees earning between $137,700 and $400,000 accounts for the majority of the plan’s new revenue. We can argue over the definition of “upper middle class,” but these people aren’t millionaires and billionaires.

And for what? The Urban Institute finds that the Biden plan would add only five years to the life of the Social Security trust funds. Social Security would become insolvent in 2040 instead of 2035. Further tax increases would surely be demanded down the road.

How can such a large tax hike do so little for Social Security’s solvency? Nearly two-thirds of the new tax revenue would be spent on expanding benefits rather than fixing the existing financial hole. The Biden plan’s expanded benefits for low-wage workers and widows make sense, but increasing cost-of-living adjustments even for high-income retirees is unnecessary. So is canceling the windfall-elimination provision, a giveaway to public employees who don’t participate in Social Security. In dollar terms, Mr. Biden’s plan would give the richest fifth a 23% greater benefit boost than the poorest fifth.

Levying higher taxes on upper-income households to pay higher benefits to those same households makes little sense when retirement savings and retirement incomes are at record highs. America needs imaginative thinking to secure adequate retirement incomes without eating up all available government resources. This isn’t it.

Mr. Biggs is a resident scholar at the American Enterprise Institute and former principal deputy commissioner of the Social Security Administration.

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