Tax Policy

Bartlett: Kennedy's Payroll Tax Gamble

Sen. Edward Kennedy (D-Mass.) has proposed to reduce the Social Security tax and eliminate the limit on taxable wages.

  • At present, workers pay Social Security taxes only on wages up to $68,400.

  • Under the Kennedy plan, workers would pay Social Security taxes on all of their earned income, with no maximum.

  • Kennedy estimates that the additional revenues from this proposal would allow the payroll tax rate to be reduced from 6.2 percent to 5.3 percent.

The aim is to reduce payroll taxes for all workers earning less than $80,000 per year. For most workers the payroll tax is the single biggest tax they pay, exceeding their federal income taxes. Moreover, the payroll tax is a significant cost of business, forcing companies to pay higher wages. The self-employed are especially hard-hit because they pay both the individual and business share of the tax, for a total of 12.4 percent.

Kennedy says his plan will be revenue neutral. But to the extent benefits are tied to taxable wages, higher-income workers would receive higher benefits when they retire. The plan would also discourage work effort among high-wage earners, and encourage corporate executives to take more of their compensation in stock options.

Thus economist Steve Entin of the Institute for Research on the Economics of Taxation estimates that the government will net only 75 percent of the revenue Kennedy estimates. Moreover, it does not appear Kennedy has taken any account of the higher benefits that will be paid out. Therefore, the plan would significantly increase the federal budget deficit and worsen the finances of the Social Security system.

Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis), January 14, 1998.

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