The Center for American Progress has a new study arguing for raising the maximum earnings on which workers pay Social Security taxes. The limit is currently $118,500, and raising it would garner some substantial revenue to shore up Social Security. But there are a lot of reasons why it might not make sense at all.
CAP’s argument is pretty much this: Since 1983, an increasing share of total earnings have “escaped” taxation by Social Security. In 1983, 90 percent of total earnings were subject to taxation. Today, only about 83 percent of earnings are taxed, meaning that 17 percent are “escaping.” From most progressives’ perspective, this pretty much settles the debate on whether we should raise – or preferably eliminate – the Social Security “tax max.” It’s by far progressives’ favorite solution to the Social Security funding problem and, for many of them, their only solution.
But there are a whole bunch of other reasons we should think carefully before raising the tax max. Here are eight:
- Social Security didn’t start in 1983. And over the program’s entire history, an average of just 84 percent of wages have been taxed, practically equal to today’s 83 percent. In fact, from 1950 through 1972, upward of 20 percent of total earnings generally weren’t taxed by Social Security. From the CAP authors’ perspective, the Social Security tax base was more inequitable during those two decades than it is today.
- The tax max helps distinguish Social Security from a “welfare” program. Under the Roosevelt administration’s original plans, high earners wouldn’t even have participated in Social Security, much less paid multiples more in taxes than they’ll collect in benefits. Eliminating the tax max would change the character of the program.
- Even if we raised the Social Security tax max to cover 90 percent of total earnings, we would still need to increase the payroll-tax rate by roughly 2.7 percentage points – immediately and permanently — to cover the program’s full promised benefits over the next 75 years, based on CBO projections. Progressives don’t talk about this very much, but they need to.
- The main reason that a greater share of earnings are falling above the tax max is that health costs are eating away at earnings for low-income and middle-income earners. Raising the tax max is a Band-Aid. Instead, fix rising health costs.
- Our tax max isn’t unusually low. In Canada, payroll taxes are capped at the average wage; in the U.K., they’re capped at 1.15 times the average wage; and Germany and Japan at 1.5 times the average wage. Social Security’s tax ceiling is 2.9 times the average wage.
- It’s a fat tax increase. Today’s top federal tax rate on earned income is about 45 percent. Adding state income taxes boosts it to around 50 percent – and in California, over 58 percent. Eliminating the tax max effectively raises the top tax rate by around 12 percentage points. We could call that Scandinavian levels of taxation, except their taxes are lower . . .
- And these higher marginal tax rates would be before we’ve done anything to fix Medicare and Medicaid.
- Economists Emmanuel Saez and Jeffrey Liebman concluded that, due to income shifting and behavioral responses, net tax collections from eliminating the tax max would be 40 percent less than SSA’s static projections. This means that one of the biggest tax increases in history would still leave a huge Social Security shortfall.
— Andrew Biggs is a resident scholar at the American Enterprise Institute.