Most people resolve in the new year to fix things in their personal lives – their 5 kilometer race time, their bunion. My resolution, though, is about economics. In 2005, I will do what I can to save the cap.

The cap – as technicians refer to it – is the earnings ceiling above which American workers’ income is free of government pension taxes. Currently, workers pay into Social Security 6.2% in tax on only the first $90,000 they earn. Their employer matches that, taking the total contribution to 12.4%. Since the amount of pension higher earners may receive from Washington after they retire is limited, the cap makes sense.

This year the obscure cap will be at the center of the pensions debate. Social Security privatization is on the national agenda now but, to privatize, lawmakers need revenue. Naturally, they are eyeing the cap. If the administration goes along, it will be undoing much of what it has achieved through its five years of tax cuts.

Here is the scenario that imperils the cap: Republicans will push for privatizing a maximum share of the New Deal program – one, or two, or four percentage points, say, out of the 6.2. After all, it is rare that you have the opportunity to reduce the public-sector share of gross domestic product through a single piece of legislation. But they will find strong opposition.

Democrats abhor the idea of privatizing Social Security – Social Security is fundamental to their notion of a collective society. Still, they know they may have to go along with the plan. They will only do so therefore if they can win concessions in the name of another of their fundamental principles: economic redistribution. Cap-lifting suits them perfectly.

They have already established a precedent: they lifted another cap, a much smaller one, on Medicare contributions, in the 1990s. It is all the sweeter that the act provides an opportunity to slam the wealthy in the name of prudent budgeting.

Republicans may give in. Relatively few Americans earn more than $90,000 a year – about 7% of the workforce.

Still, cutting such a deal would be crazy. For while the marginal tax increase involved sounds minor, it would affect not only households but also engines of small growth such as the “S corporation,” a common format for many small companies. Senator Bennett of Utah, an avid cap defender, started a time management company called Franklin Quest a few decades ago as an “S corporation.” He believes much of its very strong growth was connected with the low marginal income tax rate of 28% set in 1986 by Congress and President Reagan. “Everyone assumes this is about taxing Michael Jordan or Warren Buffett,” he tells me. “But really it is a massive hidden tax on small business.”

Massive is the accurate word. Lifting the cap represents a 12.4% increase in the marginal tax rate overall (employer side plus employee side). This dwarfs the scale of Mr. Bush’s top income tax rate reductions, commonly derided as “massive.”

Lifting the cap would turn America into a country that is much more heavily taxed – and therefore less enterprising. As the Nobel Prize winner Edward Prescott points out, studies comparing high-tax societies in Europe with the lower-tax America show that workers respond to the incentives supplied by marginal tax rates. Europeans in the market sector, by which Mr. Prescott means the taxable private sector, work a full 50% less than Americans. This is a change from the early 1970s, when individual Europeans worked harder than did Americans.*

Europeans, who pay so much for their versions of Social Security – and an enormous extra slab on top of that in healthcare – no longer desire to participate in the legal labor market as strongly as Americans. And this makes their own pensions that much smaller.

In contrast, America’s relatively light tax burden fosters a pro-work attitude. What is more, the cap on Social Security does much to offset the progressivity of America’s income tax schedule. Even those who never earn more than $90,000 a year are aware that, generally, things aren’t so bad in the higher ranges.

When you add in overtime – the bonus of the workingman – America still says: Work harder, keep more. It is not too cynical to say that is what the Bush income tax cuts were aiming for.

The best plan for Republicans therefore is to privatize as much as they can get away with. It would be fine to accept increases in the retirement age and to peg the base pension formula to inflation – which more or less takes care of the worry that, as things stand, Social Security is projected to go into deficit around the middle of the century. But Congress must not allow an increase in the share of income subject to pension tax.

If members can manage to get four or two or even a single percentage point of Social Security contributions privatized without raising the tax ceiling, they will be free-market heroes down the centuries. And to that ideal, we can all lift our caps.

* “Why Do Americans Work So Much More than Europeans?” – Minneapolis Federal Reserve