Publication Date

2-5-2013

Abstract

[Excerpt] The payroll tax for Social Security and Medicare is the largest federal tax many lower- income families pay. The Congressional Budget Office (CBO) estimates that the poorest 20% of U.S. households paid about 8.3% of their income on social insurance payroll taxes in 2009. In contrast, these lower-income households paid negative income taxes because of the refundable earned income and child tax credits. Indeed, a justification for the earned income credit (EIC) is “to provide work incentives and relief from income and Social Security taxes to low-income families who might otherwise need large welfare payments.”

The tax rate under current law on covered earnings is 12.4% for Social Security and 2.9% for Medicare. Half of the tax rate is paid by the employee and the other half by the employer; the self-employed are responsible for the entire amount. The tax rate for Social Security applies only on covered earnings below the maximum taxable limit, which is $113,700 for 2013. The Medicare tax rate applies to all covered earnings.

The Social Security Trustees project that the assets in the two Social Security trust funds will be exhausted in 2033, and after that, Social Security payroll tax revenue will cover about three- quarters of promised benefits. To help close Social Security’s long-term financing gap, some analysts have proposed increasing the Social Security tax base by raising the maximum taxable limit so that 90% of aggregate covered earnings are taxable (the percentage in 1982). CBO estimated that the maximum taxable limit would have had to been $186,000 in 2008, almost double the actual limit, so that 90% of covered earnings are taxable. They estimated that this policy could have increased payroll tax revenues by $503.4 billion over the 2010-2019 period. The Urban Institute reports that the Social Security Administration estimates the 2012 maximum taxable limit would have had to been $214,500 so that 90% of covered earnings were taxable. Since 1982, the ratio of taxable earnings to covered earnings has fallen from 90%, reaching 82.7% in 2007. 82.7% in 2007.

Although most analysts advocate raising the maximum taxable limit to increase revenues for the Social Security program, some would use the increased revenues for other purposes. For example, one analyst suggested reducing the payroll tax rate and keeping it revenue-neutral by raising the maximum taxable limit. This change would provide payroll tax relief to low- and middle- income workers.

This report examines changes in the distribution of the tax burden of four policies involving raising the Social Security maximum taxable limit.

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Suggested Citation
Hungerford, T. L. (2013). Increasing the Social Security payroll tax base: Options and effects on tax burdens. Washington, DC: Congressional Research Service.

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