NCPA - National Center for Policy Analysis


April 8, 2005

Raising the payroll tax cap sounds like a simple solution to reform Social Security, but Investor's Business Daily (IBD) says increasing payroll taxes fixes nothing.

Social Security taxes are now levied on only the first $90,000 of every worker's income. In 2000, the Social Security Administration looked at various outcomes from tinkering with the cap. The results:

  • If the cap was eliminated, a worker earning $2 million would pay roughly $240,000 in payroll taxes vs. $11,160 now, and rather than going bust in 2017, as now forecast, Social Security would go bust only six years later.
  • Raising the cap to $140,000, as suggested by AARP and other anti-reform groups, would hit about 7 million middle-class families with an average tax hike of $2,650.

Furthermore, IBD stresses the detrimental impact of raising the payroll tax on small businesses. Taxing them at higher rates would hurt the U.S. economy and possibly sink it into recession. Small businesses play a big roll in our economic success:

  • Small business owners, many with incomes over $90,000, make up 99.7 percent of all employers, employ over half of all private employees and produce roughly half of GDP -- $6 trillion in total economic activity, in current dollars, according to Small Business Administration data.
  • All of the 11.1 million net new jobs during the Internet boom came from small businesses, according to Cognetics, Inc.

The most convincing data comes from the Heritage Foundation's Center for Data Analysis where, based on a 2001 model, raising the Social Security tax cap resulted in disaster. An estimated 10.4 million workers would have their take-home pay cut by thousands of dollars and per-family savings would also drop by thousands. Business investment would plunge by hundreds of billions, leading to slower economic growth and rising joblessness.

Source: Editorial, "Keep the Cap," Investor's Business Daily, April 6, 2005.


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