Former White House economic advisor Larry Lindsey is concerned that Democratic Presidential candidate Barack Obama's plans to reform Social Security may actually transform it into a new, federal "welfare" program.
The current top level of Social Security taxation is $102,000. Under Obama's plan, those with incomes over $250,000 will have to pay higher taxes, while taxpayers who make between $102,000 and $250,000 would be protected and not have to pay new Social Security taxes.
Essentially, Lindsey said, if Obama's plan for Social Security reform is adopted, upper income taxpayers with an income of $250,000 or above, which comprise about 3 percent of the population in the U.S., will be subsidizing the retirements of upper middle class taxpayers and middle class taxpayers.
Interestingly, this would also take overall income tax rates to a level much higher than in the 1990s, Lindsey said.
Back in the 1990s, income, and Social Security taxes totaled 40 percent of income, but under Obama the overall rate would go up to 53 percent.
"Plus you will have state and city taxes, and that will take it up to 60 percent for some," said Lindsey. "That will make it difficult for Wall Street to attract talent in New York and New Jersey, which have city and state taxes, versus London, where taxes are just at 40 percent."
So basically only high-income taxpayers will wind up paying more if Obama is elected president in November.
What's more, even though higher income taxpayers will be taxed, they will receive no new retirement benefits from Social Security.
According to estimates from the Tax Policy Center, those groups could end up paying anywhere from several thousand of dollars to tens of thousands of dollars more to Uncle Sam than they currently do.
Obama hasn't said whether the money from wages and salaries over $250,000 would be taxed at the same rate.
"For someone making $200,000 or $250,000 today, Social Security is still going to be a major part of their retirement," said Lindsey. "It is not a welfare plan. It is 20 to 25 percent of retirement income. This is one of the New Deal programs that has had a lot of staying power."
The reason Obama reportedly picked the $250,000 level of income for more taxation is that he is targeting independent voters in the $103,000-$249,000 income bracket in battleground states, says Lindsey. Voters in that income bracket will not be taxed under Obama's plan.
"They really don't want to apply a tax at that level because there is a lot of votes there," said Lindsey. "There's a lot of voters there in New York, New Jersey, and Ohio. Politics is trumping good program design."
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