Removing the Payroll Tax Cap

In 2010, Social Security paid out more in benefits than it received in revenue from the payroll tax. This shortfall happened seven years before it was supposed to, and the Congressional Budget Office projects shortfalls from now on out.

One idea for making up for these shortfalls is to remove the cap on the income that is hit by the payroll tax. Currently, that cap is $106,800 on earned income, i.e., wages. Of all the ideas for reforming Social Security, removing the cap is the worst.

The main argument against removing the cap is that America simply can't afford it. Unless the Fed's quantitative easing is to be a permanent program, there'll only so much money out there, so the feds should cut spending on everything, including entitlements. But Ezra Klein of The Washington Post actually proposes expanding Social Security, and Christian Weller of Center for American Progress has even more ambitious plans for "strengthening"  the system. Both proposals require more money and both proposals involve removing the cap.

Given that Standard & Poor's just revised "its outlook on the long-term rating of the U.S. sovereign to negative from stable," such plans for expanding an already-huge entitlement are beyond irresponsible, they're frightful.  Klein and Weller aren't serious men.  When reading their ideas for Social Security expansion in this time of trillion-dollar federal deficits, one realizes that progressives are unconcerned about America's fiscal crisis (and clueless about human behavior).

Another big reason that removing the cap is an awful idea is that it would reinforce the "trust fund" fraud. This is where the surpluses from dedicated taxes, such as the payroll tax, are used as a gigantic slush fund for Congress's incumbency protection racket.  So, some of the new revenue would be spent not on Social Security recipients but given over to the general fund for use as Congress sees fit.  As such, much of the heightened revenue from an uncapped payroll tax would be, in effect, income tax.  Andrew Biggs of the American Enterprise Institute writes:

Moreover, lifting the cap would lead to some scary marginal tax rates. In my AEI outlook, I calculate that the maximum marginal tax rate on earned income, inclusive of federal income taxes, state income taxes, and payroll taxes, would rise to an average of 62 percent, ranging from a "low" of 57 percent to a high of 68 percent, depending on state.

Proponents of removing the cap on what is taxable must admit that without an accompanying uncapping of benefits, the nature of Social Security as it was set up would be destroyed.  We'd have unlimited taxation coupled with limited benefits.  Of course, the original nature of Social Security has already been handily subverted.  But removing the cap would take the system, at long last, completely away from being a quasi-pension system and convert it into being strictly welfare.

Back in the 1930s when folks still had pride and wouldn't be caught dead on the dole, progressives had to "sell" Social Security to the American people as being something other than welfare (video). So progressives told America that the new Social Security program was insurance. "But the hearts of men are easily corrupted."  Soon folks convinced themselves that they were only getting back what they had put in, when the simplest math would have told them that they were getting back far more.

Social Security is already pretty close to being pure welfare, as 85 percent of the benefits of high-income retirees are taxable (see the worksheet for Line 20 of the 1040 form). So if one is in the top tax bracket (35 percent), one can send almost 30 percent of one's Social Security benefit back to feds as income tax. What other pension system denies you your earned benefits simply because you have other income?

We've been down this road before: In 1993, a Democrat Congress and a Democrat president removed the cap on the portion of the payroll tax dedicated to Medicare.  Since then, all earned income has been taxed for Medicare, and for a while the extra revenue fully funded Medicare and provided a nice little surplus for Congress's slush fund.  But removing the cap proved to be a temporary fix, as Medicare revenue soon became inadequate to pay benefits, just as the payroll tax rate hike of 1983 proved to be inadequate to permanently fund Social Security.

It must be embarrassing to have to continually be going back for more money lest the feds renege on their promises to the citizenry. But progressives can't be embarrassed. Although progressive systems are supposed to be permanent features of the government, they can't stand on their own for long. This is because progressives are always adding more benefits and more beneficiaries to their entitlements. Some progressives think that all income, not just earned income, should be taxed for Social Security. But why stop with income, why not just confiscate folks' property? Yeah, that'll fix the system.

Because Social Security is welfare, one way to deal with the shortfall in revenue is for Congress to impose more means testing of benefits, not hike taxes.  High-income earners who want to help out with America's fiscal crisis should accept such cuts.

Jon N. Hall is a programmer/analyst from Kansas City.
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