What Should We Do About Social Security Taxes?

jwoodie

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Aug 15, 2012
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The most important, but least discussed, "tax cut" which is set to expire on January 1, 2013 is the "temporary" reduction is Social Security taxes. This politically expedient "stimulus" to the economy has done nothing but accelerate the impending insolvency of this program, but allowing it to expire will result in a noticeable reduction in the disposable incomes of middle class families. When this is compared with the much ballyhooed "tax cuts for the wealthy," it is easy to understand the political appeal of the "class warfare" argument.

The real winners in this scenario are individuals earning between $110,000 and $200,000 who escape Social Security taxes on these amounts but are below the radar screens of the "tax the rich" crowd. It seems to me that the most equitable way to address this problem is to let the Social Security tax cuts expire but eliminate the earnings cap on these taxes. This would result in a more justifiable, but less economically damaging, increase in tax revenues than would raising income tax rates.

Thoughts?
 
The most important, but least discussed, "tax cut" which is set to expire on January 1, 2013 is the "temporary" reduction is Social Security taxes. This politically expedient "stimulus" to the economy has done nothing but accelerate the impending insolvency of this program, but allowing it to expire will result in a noticeable reduction in the disposable incomes of middle class families. When this is compared with the much ballyhooed "tax cuts for the wealthy," it is easy to understand the political appeal of the "class warfare" argument.

The real winners in this scenario are individuals earning between $110,000 and $200,000 who escape Social Security taxes on these amounts but are below the radar screens of the "tax the rich" crowd. It seems to me that the most equitable way to address this problem is to let the Social Security tax cuts expire but eliminate the earnings cap on these taxes. This would result in a more justifiable, but less economically damaging, increase in tax revenues than would raising income tax rates.

Thoughts?

Would you then remove the cap on benefits paid out? The concept of the payroll tax cap is that there is also a cap on payouts. So we remove the payroll tax cap but keep the benefit cap, and thus we go back to having other people pay for our stuff.
 
The payouts are already scaled back for higher earners: 60% for low earners, 30% for middle earners and 15% for high earners. Given the additional taxability of SS benefits for higher incomes, this is largely a moot issue. If necessary, however, a nominal payout (e.g., 7.5%) could be established for super high earners (which would still result in a net surplus to the SS program).
 
Tough call - the lower SS tax rate over the past couple of years hasn't helped stimulate the economy much, GDP growth is lower this year than last, and last year's was lower than 2010. The question to ask is, what'll happen if that tax rate is allowed to go back up? IMHO, now ain't the best time to be raising taxes on anybody, I'd extend it for another year and see where we are then. This is a fiscal conservative talking here who doesn't like higher deficits, but I don't think now is a good time to be shrinking people's take home pay.
 

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