NCPA - National Center for Policy Analysis

Uncapping Social Security Taxes

February 5, 1999

Alert tax analysts have noticed that President Clinton has not ruled out increasing the amount of wages subject to Social Security payroll taxes. In his State of the Union message, he indicated that raising rates was not the way to go. But he left open the option of raising or eliminating the cap on the amount of income which could be taxed -- currently applying to the first $72,600 in wages.

Experts say that eliminating the cap would constitute the largest tax increase in U.S. history.

  • Subjecting all wage and salary income to the present 12.4 percent payroll tax rate would result in an increase of $425.2 billion.
  • That would dwarf the size of the last three tax increases -- $240 billion in 1993, $167 billion in 1990, and $195 billion in 1982.
  • Removing the cap in 1999 would extend Social Security's financial lifetime by only six years -- from 2013 to 2019.
  • The top marginal tax rate for millions of workers would climb to 54.9 percent -- the highest since the 1970s.

The increase would affect more than just the well-off. All told, 8.3 million households would see their taxes increase, by an average of $9,147 in the first year after the cap was removed. Many of the 465,000 American workers age 62 and above who would be affected might retire early rather than pay the extra taxes.

If the cap were removed this year, between fiscal years 2000 and 2004 real disposable family income would drop by $62.7 billion, personal savings would decline by $34.4 billion and real consumer spending would fall by $35.1 billion.

Sources: Gareth Davis and Mark Wilson (both of the Heritage Foundation), "Clinton Leaves the Door Open to a Tax Hike," Wall Street Journal, February 5, 1999.

 

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