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

Source: Thomas L. Hungerford, Congressional Research Service, CRS Report for Congress, RL33943, February 5, 2013

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 three quarters 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 higher earning 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….

… 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….