Thursday, August 21, 2008

Would Obama apply Social Security tax to non-wage income?

I've been hearing that the Obama campaign is keeping open the option of applying their proposed surtax on earnings over $250,000 to all income, not just wage and salary income that have until now been the object of Social Security taxes. A few quick thoughts on this:

First, this would be a reversal of previous campaign statements. In this story from June 13, "Campaign aides said the additional tax, like the current one, would apply only to wages and salaries and not to other forms of income such as investments." There may be a political price to pay for this, but campaign flip flops aren't unusual.

Second, this would increase the size of the tax increase, but also increase the policy's effect on Social Security financing. None of the existing Social Security models (CBO, SSA, etc.) can easily handle non-wage income, so I can only guestimate this on a (very) rough basis. According to the Census, in 2006 there were 2.24 million households with incomes exceeding $250,000 and their average income was $448,687. If you hit the average household with a 4% tax that produces $17,947 in additional revenue, which multiplied by 2.24 million equals around $40.2 billion. That's equal to around 0.69 percent of payroll. If the tax increase were implemented immediately and everything else stayed the same it would fix around 41 percent of the 75-year deficit (1.7 percent of payroll).

Now, that's the high end of what it would solve; the Obama campaign has recently said that the tax increase wouldn't be implemented for another decade, plus households' taxable earnings are lower than their total earnings. The delay alone would reduce the improvement to around 38 percent of the 75-year deficit, and the tax base issue would probably pull off another few percent. I'm also assuming that no extra benefits would be paid, although Obama's folks have kept this option open. So my guess is that the plan would fix around 1/3 of the 75-year deficit, tops, assuming no behavioral effects or increase in evasion. So even with the most, uh, liberal application of the surtax it would not be possible to avoid other tax increases, reductions in benefits or increases in the retirement age, as Sen. Obama has promised.

Third, this would explain some recent statements on taxes from the Obama campaign that struck me as odd. Consider this statement from Sen. Obama at an event in Springfield, MO on July 30:

"Let me be clear: if you're a family making less than $250,000, my plan will not raise your taxes - not your income taxes, not your payroll taxes, not your capital gains taxes, not any of your taxes."

Why does this matter? Because payroll taxes are levied on an individual basis, most observers had previously assumed that the Obama surtax would apply only to individuals earning over $250,000. Income taxes, however, are levied on a household basis, and the Census income data cited above is based upon households. The July 30 statement could be a hint that the Obama campaign is thinking about applying their surtax on a family basis.

If so, Social Security taxes could be increased in individuals earning as little as $125,000 – only slightly above the current cap of $102,000. This would render some of Sen. Obama's previous discussions of the Social Security tax structure inaccurate (e.g., see the final Democratic primary debate). It might also play into Obama's pledges regarding the capital gains tax rate, though I'll leave that to the tax folks to sort out.

6 comments:

chengja said...
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chengja said...
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