PayGo: Cut Payroll Taxes Now, Raise Them Later
February 12, 2001
Some Democrats want to cut the Social Security payroll tax in lieu of income tax rate reduction. But unless a payroll tax cut is tied to long-term Social Security reform, it will only make reform more difficult in the future.
The Democratic Leadership Council recently outlined the case for a payroll tax cut.
- Three-quarters of workers pay more in Social Security taxes than federal income taxes -- the lowest income tax rate of 15 percent is less than the 15.3 percent combined payroll tax rate on employers and employees.
- "Since work is taxed at a flat rate," says the DLC, "and earnings above $80,400 are exempted entirely from the Social Security portion of the payroll tax, this tax imposes an onerous burden on low-to-middle income families."
However, unlike other taxes, there are specific benefits attached to Social Security contributions. Most workers get back everything they pay, with low-wage workers getting back a great deal more. Thus, looking at taxes and benefits together, the system is highly progressive.
Maybe the DLC wants to put Social Security on a pure pay-as-you go basis, with tax rates rising automatically to pay future benefits.
- Right now, since there are more revenues coming into the trust fund from payroll taxes than are needed to pay current benefits, we could cut the payroll tax rate about 2 percentage points.
- However, in about 15 years it would be necessary to start raising payroll taxes above their current level to pay promised benefits.
- Eventually the Social Security tax rate would have to rise 6 percentage points above today's level, to almost 20 percent by 2075 (see figure).
The Social Security tax rate should be cut in the context of true Social Security reform that eventually establishes a funded system based primarily on private accounts.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, February 12, 2001.
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