Adam Smith Institute

Barak Obama's social security (pensions) plan looks a mess. Last month, he called for a new social security payroll tax on incomes above $250,000 a year. Currently, the tax is levied only on the first $102,000 of income. That's easily more than the wages of most Americans, but to avoid antagonizing the middle-class millions who do earn more, Obama's plan is to leave incomes between $102,000 and $250,000 untouched. So it's only the 'millionaires and billionaires' – about 3% of the taxpaying population – who will pay it.

Whoever said that politics is two wolves and a sheep deciding what to have for dinner? The argument is that the tax would be just small change for the likes of Warren Buffett. But does that make it just? Where do we end up when politicians forget the principle of equal treatment and are willing exploit minority groups one by one?

Actually, we need more millionaires and billionaries, and we need to encourage people to make themselves millionaires and billionaires. They days have gone when rich people owed their wealth to inheritance so that an extra tax really was small change for an unproductive class. But today, wealth comes principally through building up a business. You take a huge risk, but you reap a huge reward. Like the National Lottery, it's the size of the star prize that induces millions of people to take the gamble. Lower the reward and the number of players tails off remarkably quickly. Taxing 'the rich' is a counterproductive policy.

And, of course, moves like this further complicate the tax code.

The US social security system, like the UK's National Insurance, is already corrupted by this sort of expediency. In the US, the payroll tax is 6.2% – but as in the UK, employers pay a lot more (indeed twice as much, in the US, at 12.4%). That's designed to disguise the tax: employers notice it but employees don't. Until businesses find their costs rising so much that they have to lay people off, of course.

The system's rotten. The quicker we move to a compulsory, privately funded pension system the better.

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