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Institute for Workplace Studies----------------- Professor Samuel B. Bacharach

School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies

Cornell University

16 East 34th Street, 4th floor---------------------- Stuart Basefsky

New York, NY 10016 -------------------------------Director, IWS News Bureau

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Congressional Research Service (CRS)

 

Increasing the Social Security Payroll Tax Base: Options and Effects on Tax Burdens

Thomas L. Hungerford, Specialist in Public Finance

February 5, 2013

http://www.fas.org/sgp/crs/misc/RL33943.pdf

[full-text, 13 pages]

 

Summary

According to the Social Security Trustees, assets in the two Social Security trust funds will be

exhausted by 2033, and, thereafter, Social Security payroll tax revenues will cover about threequarters

of promised benefits. Over the past decade several proposals have been put forward

which could help to close the Social Security program’s long-term financing gap. One proposal

would increase the Social Security payroll tax base so that 90% of covered earnings are taxable—

the same proportion as in 1982. This policy would increase the payroll taxes paid by higherearning

workers and not affect workers earning less than the current Social Security maximum

taxable limit, which is $113,700 in 2013.

 

Some analysts have proposed raising the Social Security payroll tax base and reducing the payroll

tax rate. This policy would increase the taxes paid by higher-earning workers and reduce taxes

paid by low- and middle-income workers. This policy proposal could raise revenue for the Social

Security program or be revenue neutral.

 

Although the legislated Social Security payroll tax rate is 12.4%, the average Social Security

payroll tax is slightly progressive throughout the bottom 80% of the income distribution in that

lower-income families pay a lower proportion of income in payroll taxes than higher-income

families. At the higher-income levels—the top 20%—the payroll tax is regressive in that the

proportion of income paid in payroll taxes falls as income rises. The richest 1% of American

families pay a smaller proportion of their income in payroll taxes than the poorest 20% of

families.

 

Four policy options, which raise the payroll tax base, are examined; two of the policies also

provide tax relief to low- and middle-income workers. Each of the three policies reduces the

regressivity of the payroll tax at the upper end of the income distribution. Currently, less than

10% of families contain a worker earning more than the maximum taxable limit. Consequently,

over 90% of families would be unaffected by increasing the maximum taxable limit. And if this

change were combined with a payroll tax rate reduction, over 90% of families would pay lower

payroll taxes.

 

It has been argued that the revenue increases from raising the payroll tax base would be

significantly less than expected because of indirect behavioral changes by workers. These

predicted behavioral effects would reduce taxable earnings, the proportion of family income

subject to payroll taxes, and tax revenue. But recent research raises doubts concerning this

position and suggests these behavioral effects would likely be negligible.

 

Contents

Taxable and Covered Earnings ........................................................................................................ 2

The Distribution of Tax Burdens ..................................................................................................... 3

Behavioral Effects of Tax Changes .................................................................................................. 7

 

Figures

Figure 1. Taxable Earnings as a Percentage of Social Security Covered Earnings, 1950-2011 ......................... 3

 

Tables

Table 1. Average Social Security Payroll Tax Rates, 2012 .............................................................. 4

Table 2. Average Change in Annual Social Security Payroll Taxes, 2012 ....................................... 6

Table 3. High-Earning Workers and Taxable Earnings by Quintile, 2012 ....................................... 8

 

Contacts

Author Contact Information........................................................................................................... 10

 

 

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