Lower the Tax Rate on Social Security

Friday, 08 Mar 2013 07:52 AM

By Barry Elias

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The Social Security program can be sustained over the long run if we lower the tax rate. While this may seem anathema to the conventional wisdom, it may be the cornerstone that promotes our economic revival.

In 2013, only the first $113,700 of annual earned income is subject to the 15.3 percent social security and medicare tax. While half of this amount is paid by the employer, most of this tax is reflected in a lower salary to keep the total employment expense down.

Further, unearned income (taxable interest, dividends and capital gains) is not subject to the social security tax. However, unearned income accounts for nearly half of all income in the United States.

By increasing the tax base to include all income — earned and unearned — we could halve the tax rate and provide the same level of tax revenue. For the median household income of $50,000, this would result in an annual tax savings of approximately $3,750. The lower rate would provide more incentive to employ, thereby increasing the social security tax revenue.

In previous columns, I indicated that Medicare taxes apply to a threshold level of income. This is the case for Social Security and was the case for Medicare from its inception in 1965 through 1993. However, from 1994 through 2012, the 2.9 percent tax was applied to all levels of earned income — unearned income was excluded.

This year, an additional 0.9 percent will apply to earned income above $200,000 for individuals and $250,000 for married couples filing jointly. In addition, unearned income will be taxed at 3.8 percent when total income — earned and unearned — exceeds these levels.

This recommendation for Social Security would have a greater probability of success if we strengthen our medium of exchange. I will provide more on this policy prescription in future columns.

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