Larry Kudlow comments on Barack Obama's plan to increase the Social Security payroll tax cap:
Uncapping the payroll tax reveals still another cultural misstep by Sen. Obama. He apparently has a difficult time understanding that nowadays, a veteran fireman or a veteran cop, married to a veteran schoolteacher, will make well over $100,000. In fact, they can make close to $200,000. Yet Obama still wants to go ahead and tax both the first and last payroll dollar of this group at a very high marginal tax rate by uncapping the Social Security (FICA) tax.A couple thoughts:
First, in fairness to Obama, he has said that while he would eliminate the payroll tax cap, we would create a "donut hole" exempting earnings between $100,000 and $200-$250,000. So while he was challenged in the Philadelphia debate that his Social Security plan would raise taxes on individuals earning under $250,000, his Social Security plan would not do so. (Whether he could sustain the exemption is another story.)
Second, Kudlow implies that payroll taxes are levied on the combined income of a married couple, as ordinary income taxes are. In fact, both Social Security and Medicare taxes are paid on a purely individual basis. This can lead to inequities, of course: households with the same earnings may pay different taxes depending on how the earnings are distributed between spouses.
Under current law, for instance, a couple would MUCH rather have a single spouse earning $200,000 than both spouses earnings $100,000 each. Why? On the tax end, the single earner couple would pay 6.2% of their joint $200,000 earnings in Social Security taxes, while the dual-earner couple would pay 12.4%. Moreover, at retirement the non-working spouse in the single earner couple would be eligible to a spousal benefit equal to half the working spouse's. So the single-earner couple pays half the taxes of the dual-earner couple, despite having the same earnings, and receives 3/4 of the benefits. In other words, the single earner couple receives 50% more benefits for its tax dollar than the dual-earner couple. Just another example of quirky redistribution under the Social Security tax/benefit formula...