NCPA - National Center for Policy Analysis

Eliminating The Payroll Tax Cap

January 19, 1999

To meet the Social Security system's looming financial crisis, some policymakers have called for increasing payroll taxes by eliminating the maximum amount of wages subject to the tax. The current payroll tax is 12.4 percent on labor income up to the maximum taxable amount (the tax cap) -- which was $68,400 in 1998. The tax cap is indexed to the annual rate of growth in average wages.

Using government data and an economic model of the U.S. economy, Heritage Foundation analysts found that eliminating the cap on taxable wages would:

  • Push back the system's insolvency date by only six years, from 2013 to 2019.
  • Result in the largest tax increase in the history of the United States -- $425.2 billion in nominal dollars over five years.
  • Increase the top federal marginal effective tax rate on labor income to 54.9 percent, its highest level since the 1970s.
  • And reduce the family budgets of 23.4 million Americans by an average of $9,147 in the first year alone after the tax cap is removed.

Heritage projects that the economic effects of the tax increase would reduce the number of job opportunities by 219,000 in 2004 and reduce personal savings by $34.4 billion that year as well. Finally, it would reduce private saving for retirement and charitable contributions.

Source: Gareth G. Davis and D. Mark Wilson, "The Impact of Removing Social Security's Tax Cap on Wages," Report No. 99-01, January 19, 1999, Heritage Center for Data Analysis, Heritage Foundation, 214 Massachusetts Avenue, N.E., Washington, D.C. 20002, (202) 546-4400.


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