Ramesh Ponnuru gets this right:
The payroll tax currently applies only to the first $90,000 of wages. If you make more than that, payroll taxes are not taken out of your additional wages. Bush was asked whether he would support raising that “cap” on payroll taxes. His answer: “The only thing I’m not opened-minded about is raising the payroll tax rate. And all other issues are on the table.” So he is open to raising the cap. That’s a tax increase, and potentially – depending on how high the cap were lifted – a massive one.
Ramesh’s concern seems to be the political ramifications. Edward Prescott is likely to argue that increasing the marginal tax rate lowers labor supply especially since he was so concerned about couples that earn $100,000 per person. Such couples currently have a marginal employment tax rate equal to zero.
Now I’m all for having the well to do pay more in taxes given we have a massive General Fund deficit that will require some explicit or implicit tax increase on someone. But why does Bush not go for a more gradual increase in marginal tax rates on other forms of income – say capital income? Has Dr. Prescott commented on this proposal lately?