Friday, July 2, 2010

Should we lift the payroll-tax ceiling to fix Social Security?

I have an article on lifting the Social Security payroll tax ceiling over at The American, AEI's online magazine:

Over at ThinkProgress, Matt Yglesias argues that a sensible solution to Social Security's long-term funding shortfalls would be to eliminate the so-called "tax max," the $106,800 maximum earnings on which Social Security's 12.4 percent tax is levied and upon which benefits are calculated. In other words, individuals would pay taxes and earn benefits based on their total earnings, no matter how high. According to the Social Security Administration's (SSA's) Office of the Actuary, this step—if implemented immediately—would eliminate around 95 percent of the long-term "actuarial deficit." Yglesias calls eliminating the tax max "a very reasonable response to the fact that over the past thirty years the share of national income accruing to very high income individuals has gone up dramatically."

Click here to read the whole article.


Arne said...

When you say "that same person would pay an additional tax of 12.4 percent", you make it sound like that $107K earner would owe $13K more because of the change. But they would only owe extra on amounts over $107K, so for the worker you described, the impact would be zero.

Andrew G. Biggs said...

There I was referring to their marginal tax rate: if they decide to earn an extra dollar, how much of it will they keep? That's going to be the factor in seeing if higher taxes will hurt economic incentives. The average tax rate (meaning total taxes/total income) doesn't matter as much, and in fact might affect things positively if done right.