A Progressive Payroll Tax 1 - Low Wage Workers
The Social Security payroll tax (or FICA or SECA tax) is
often referred to as a regressive tax. That is because even low wage workers or
self-employed businesses are required to pay the tax even if the income level
is so low that no federal income taxes are payable by these individuals.
Having to pay this mandatory tax is not necessarily a bad
thing because paying the tax provides the workers with retirement, survivor,
and disability coverage or insurance.
On the other hand, the formula which is used to determine
the amount of Social Security benefits which are payable is a progressive
formula in that low wage workers do receive a benefit which represents a higher
percentage of their average wages. High average wage workers receive a lower
percentage. This is because a person’s unreduced benefit amount is calculated
using a three tier or bend point formula. These tier or bend points are
different depending on the year a worker first become eligible for benefits.
For 2014, here is how it works. (Note that this is more
complicated – so don’t try this at home! I’m only citing the information here
to illustrate how the benefit amount formula and its progressive bend points or
tiers work.) In 2014 the monthly benefit for a first eligible worker is the sum
of the 3 following amounts:
1. 90% of the first $816 average, indexed monthly earnings
2. 32% of the earnings over $816 and up to $4917 average,
indexed monthly earnings
3. 15% of any average, indexed monthly earnings over $4917.
Thus, a worker first eligible in 2014 whose average indexed
earnings over their working career were $816 times 12 months or $9792 would
receive a benefit, before any reductions, of 90% of this amount or $8812. All
others whose average, indexed monthly earnings exceed the first bend point
would receive a benefit that represents a lower percent than 90% of their
average, indexed monthly earnings, with high average earners receiving the
lowest percentage of their average, indexed monthly earnings.
The progressive benefit formula using the three tier system
of bend points is a good thing, but it is not enough. The BEST Social Security
Modernization Plan is also proposing that Social Security adopt a progressive three
tier payroll tax system to make it less regressive for low wage workers.
However, at the same time I am generally opposed to any sort of means testing
for Social Security. Social Security benefits represent an earned right and
means testing only serves to erode confidence in the very important Social
Security program.
Here is how the payroll tax currently works for employees in
2014. An employee pays 6.2% into the Social Security trust fund plus an
additional 1.45% Medicare tax. The 6.2% tax must be paid on all wages up the
and including the 2014 payroll cap of $117,000. The 1.45% Medicare tax is not
subject to the cap and must be paid on all wages. The employee’s employer pays
a matching equal amount. Thus, the total amount paid into the Social Security
trust fund is 12.4% payroll tax and 2.9% Medicare tax for a total of 15.3%.
The self-employed currently pay the equivalent tax of both
the employee and the employer or 12.4% into the Social Security trust fund and
2.9% to the Medicare trust fund for a total of 15.3%.
Here is what I
propose: All workers whose earnings for the entire year are the equivalent
of the wages for a full time worker earning the federal minimum wage shall be
eligible for a 3% rebate of the payroll taxes they paid for the year,
refundable at the time a federal income tax return is filed for that year. The
2013 federal minimum wage is $7.25 an hour. Thus, for a 40 hour week for 52
weeks, this comes to $15,080. A 3% rebate could be as high $452.40.
The rebate is payable at the time a federal income tax
return is filed. It is not means tested like the Earned Income Tax Credit
(EITC). Anyone whose total earnings for the year do not exceed $15,080 would be
eligible, including part-time workers, even if their hourly wage exceeds the
minimum wage as long as their total combined wages and self-employment earning
for the year are $15,080 or less and regardless of other income and resources.
This annual amount will increase as the minimum wage increases.
The self-employed whose combined wage and self-employment
earnings for the year are $15,080 will pay a 9.3% self employment tax rather
than the usual 15.3% SECA tax rate.
The idea for this proposal predates the 2% payroll tax
rebate, of 2011-2012, and it is possible that the 2% idea may have stemmed from
The BEST Social Security Mod Plan’s many earlier publicity attempts. The “BEST”
plan’s idea is better for 2 reasons: It is more progressive in that it provides
a 3% tax reduction for lower wage workers, and since the money is only refundable
upon filing a tax return, those who are eligible will receive a lump sum rather
than a small weekly increase. Having $200-$400 to spend all at once could enable
someone to make a much needed purchase and that spending might even boost the
economy.
Who will tier one of the progressive payroll tax benefit? In
addition to low wage workers, it could benefit struggling students who work
part time or during the summer, retired seniors who work part time, or start up
self-employed businesses. It would even benefit those with modest level of rental
income or short-term capital gains who upon the new definitions of work will be
required to contribute Social Security payroll taxes on their earnings.
It may particularly serve to boost confidence in the Social
Security program of younger workers and students.
Where would the funds for this 3% rebate come from? It could
come from the Social Security trust fund, but legislation could direct these
refund amounts to be paid from general tax revenues, thereby boosting the
Social Security trust fund. Keep in mind, these refunds will only be made if
they are claimed via a federal tax return.
