Read Those Lips: More Taxes

By DAN GOODGAME

Welcome to 1990: millions of American workers have by now ripped open their first pay envelope and discovered an unpleasant surprise: their take-home is less than it was in December. Reason: that line on the check stub labeled FICA, better known as Social Security, is taking a bigger bite than ever. A wage earner making $51,300 or more this year will pay the maximum $3,924 in Social Security taxes -- $320, or nearly 9%, more than in 1989.

In fact, 3 out of 4 Americans now pay less in federal income taxes than in Social Security taxes (including their employers' matching contributions, which indirectly come out of workers' pay). Since a 1983 "reform" of Social Security, both the tax rate and the maximum income subject to tax have risen rapidly, ostensibly to set aside a fund for future retirees. For most wage earners, these rising FICA deductions have gobbled up more money than was saved by Ronald Reagan's popular cuts in income taxes. Since 1980, total federal tax collections remain virtually unchanged at 19% of national income.

The latest hike in the Social Security levy is scrambling Washington's political alignments. Democratic Senator Daniel Patrick Moynihan, a New York liberal, proposes to roll back the Social Security tax from the current 7.65% to 6.55% over the next two years, a plan that would save $600 for workers paying the maximum amount. Moynihan would return the retirement system to a pay-as-you-go basis rather than piling up surpluses ($52 billion in 1989) that are diverted to finance other Government programs and cover up the full size of the federal deficit.

The Senator's plan has rapidly attracted support among Republican as well as Democratic lawmakers, business interests and conservatives. Meanwhile, the President, whose lips usually read "No new taxes," has come out against the proposal, claiming that it endangers the Social Security checks of future retirees -- to say nothing of the $55 billion it would require Washington to ^ find in spending cuts or new revenues in 1991.

Bush thus finds himself defending the Social Security tax increase while getting pummeled by Moynihan and his allies. Watching this spectacle unfold last week, Bruce Thompson, a Merrill Lynch executive who helped slash taxes as a senior Treasury official during the Reagan Administration, chuckled and noted that "not in ten years have you seen headlines read WHITE HOUSE REJECTS TAX CUT."

The President's stance is even shakier, given his campaign to cut the rate on capital gains, a measure that would mostly benefit taxpayers earning more than $200,000 a year. The President, along with probable majorities on Capitol Hill, in effect proposes to cut taxes on the wealthy while raising them on wage earners.

Addressing the Cincinnati Chamber of Commerce last week, Bush made his usual pitch that lower capital-gains taxes would encourage investment. He pointedly failed to mention Social Security taxes. But the Cincinnati group's parent organization, the U.S. Chamber of Commerce, endorses lower taxes for both capital gains and Social Security, as do the National Federation of Independent Businesses and the conservative Heritage Foundation, Bush's favorite think tank. Says Donald Leavens, a budget expert for the U.S. Chamber: "How can you go against such a good idea? It's populist, and it will do a lot for economic growth."

Whatever the fate of Moynihan's proposal, it promises to enliven a long- muddled national debate on who gives and who gets in the U.S. tax system. Reversing his earlier support of the 1983 Social Security reform, Moynihan is confronting two powerful myths perpetrated by Washington tax writers.

-- Myth No. 1 is that Social Security revenue ($309 billion this year) is reserved exclusively for Social Security, the bulk of it in trust for the next generation of retirees. Much of it is not. The money pays Social Security benefits now due, and the surplus (projected to reach $75 billion in 1991, rising to $236 billion in the year 2000) is "borrowed" to finance the whole gamut of federal spending, from nuclear missiles to salaries for Head Start teachers. "With or without a payroll tax cut, there will be no Social Security fund surplus," says Stephen Moore of the Heritage Foundation. "All that is in the 'fund' is a stack of IOUs from the Treasury."

When those IOUs come due as the baby boomers retire, the Government will have to raise income taxes or cut retirement benefits, regardless of whether surplus FICA taxes were collected years earlier. The only question is how progressive a tax system Americans want in the meantime.

-- Which leads to Myth No. 2: that most Americans have benefited, at least a little, from the income tax cuts of the past decade. In fact, as their income tax savings have been offset by rising Social Security levies, wage earners have been stuck with an unfair tax that exempts income over a certain ceiling (now $51,300) and in effect taxes workers at a higher rate than factory owners.

In his State of the Union message later this month, Bush will present his own plan, closely guarded so far, to gradually stem the Treasury's reliance on Social Security revenue. Still, some of his senior aides are worried that the White House proposal will prove no match for Moynihan's scheme, which one presidential aide described as "artful and attractive by any standard." As Bush should know, it's tough to beat a tax cut, especially in an election year.

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CAPTION: Maximum Social Security tax