Monday, January 7, 2013

Barney Frank Eyes Payroll Tax Threshold Change to Hit CFBNARs

Former Congressman Barney Frank (D-MA), who seems to want to take the interim Senate appointment should John Kerry become Secretary of State, is making noises about raising the income threshold where Social Security taxes stop. It's a pretty good way to put Social Security's solvency on stronger footing, and there's a strong case that doing so is a good way to adjust for the way economic reality has changed in the past 30 years.

Let's do a quick recap. Social Security is paid for through payroll taxes. For every $1 of wages or salary, $0.062 is withheld as social security, so the worker only sees $0.938 today (though they'll get paid back, in essence, through Social Security wages when they retire). But, this only applies to the first $110,000 or so in income, though that threshold is adjusted every year for inflation. Historically, the payroll tax cap has meant that about 90% of income is subject to social security taxes, but the explosion in inequality over the past generation means that the tax covers only about 84% of income. Taxing the first $200,000 or so in income would get us back to the historical 90% threshold while still mostly preserving the "you get out what you get in" nature of Social Security, which is a big reason for the program's political stability.

I'm still not clear what the state of the economy is right now--private sector employment has largely recovered, and we're even seeing the tiniest hints of wage growth, but the employment/population ratio is still in the shitter--but if we're going to increase taxes, this seems to be a workable way to do it, and would hit primary the cash-flow-but-not-asset-rich who made out like bandits in fiscal cliff negotiations. But changing payroll tax rates and thresholds is fairly straightforward. Also, pleasantly not result in a hideous increase in tax compliance costs and annoyances, like, say, the Pease Limit.

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