Should Social Security Taxes Affect All Wages? A Modest Rise Is Fine, but It’s Not a PanaceaPosted: April 19, 2013 Filed under: Economic Growth and Productivity, Income and Wealth, Shorts, Taxes and Budget 1 Comment »
Arithmetic tells us we must either decrease the growth of Social Security spending or increase taxes as a share of gross domestic product.
But we should do it with an eye on fairness, growth and efficiency. We’re all in this together, so higher-income families must give up something to deal both with Social Security shortfalls and those in the budget more generally. A modest increase in the wage base for Social Security has some justification since that base has eroded in recent years. But if extended too far, it exacerbates the squeeze on other government programs. How? On the tax side, it tends to preempt other tax increases for non-Social Security purposes. On the benefit side, it attempts to maintain a growth rate of Social Security and other elderly programs that absorb more than all of the scheduled growth in government spending for decades to come, thus continuing a downward spiral in the share of the overall budget devoted to children, education and investment more generally.
Under current Social Security formulas, ending the cap on income would mean that some fairly wealthy individuals would get benefits in excess of $1 million. Though no one thinks that that makes sense as a benefit schedule, capping benefits goes against the Social Security tradition of being paid back for additional contributions. On the technical front, an unlimited Social Security tax would also encourage individuals to reclassify labor income as capital income not subject to Social Security tax. This would be a special problem for the self-employed and owners of partnerships, since Social Security now taxes both their capital and labor income as labor income.
Finally, the Social Security Administration’s Office of the Actuary found that even with a cap on benefits, the wage base expansion would still leave the program running future deficits. We shouldn’t pretend that it does otherwise.
This column was reposted from New York Time’s Room for Debate.
I would split the employee and employer taxes utterly, with the employer contribution funded by a consumption tax with no limit and automatic fiscal adequacy (rather than automatic benefit cuts) and an employee contribution which the poor don’t pay at all (with an end to the EITC) and a lower ceiling so as to cut higher end benefits based on salary. We want more equality – including fully taxing non-wage income by using consumption taxes.