A Progressive Payroll Tax 2 - Mid & Upper Wage Workers

A Progressive Payroll Tax 2 - Mid & Upper Wage Workers

My December 8, 2013 post discussed Tier One of the progressive payroll tax which offers a 3% rebate for workers/self-employed whose earnings for a calendar year do not exceed the federal minimum wage level equivalent for a full-time worker. The rebate is payable to workers, but not employers, upon filing a federal tax return and it does not in any manner change an employer’s requirement to withhold payroll taxes in the established manner.

Tier Two is the status quo. Payroll taxes and self-employment taxes will remain the same as they have been for a number of years. Here is a link which provides the Maximum Taxable Earnings since the Social Security program began: http://www.socialsecurity.gov/planners/maxtax.htm .

Tier Three will require employees and the self-employed to pay a higher FICA/SECA tax rate for a portion of their earnings. This higher rate applies only to the employee share and will not apply to the employer’s tax share. The maximum taxable earnings cap will not be scrapped.

While this sounds complicated, in this computer era its effectuation will be simple. Currently, employees pay a 7.65% tax which consists of 6.2% toward the Social Security trust fund and an additional 1.45% Medicare tax which is not subject to the maximum taxable earnings cap.

I am proposing that earnings “within” this new Tier Three zone will be taxed at a 8.2% rate (or a new total 9.65% rate). Thus, an employee will pay 7.65% (total) for a portion of their earnings that fall within Tier Two and 9.65% (total) for the remaining portion of their earnings which fall within the Tier Three zone.

The self-employed will be responsible to pay an additional 2% (not 4%) for all their earnings that fall within the Tier Three earnings zone.

Employers will be required to withhold this higher tax, but workers with multiple jobs may have to pay the additional required amounts via their federal income tax return if necessary.

How is Tier Three defined? As we have previously noted, the maximum taxable wage base increases yearly (or, as we noted in a prior post, the law should be changed so that it automatically increases each year). Upon enactment of the BEST Social Security Mod Plan, Tier Three will begin with the first Maximum Taxable Earnings increase after enactment and will continue for the following nine years for a total of ten years. Tier Three will consist of a rolling ten year zone where the cumulative amounts of increases in the Maximum Taxable Earnings wage base will be taxed at the higher 8.2%/9.65% rate.

Here is an example: The BEST plan is enacted into law in 2014. Let’s assume for simplicity sake that, in 2015 and for the next 11 years, the taxable wage base increases $3,000 each year.  The 2014 amount of $117,000 increases in 2015 to $120,000. The portion of all earnings greater than $117,000 will be subject to paying the 8.2%/9.65% rate. This is year one. 2016 will be year two. If the taxable wage base increases in 2016 to $123,000, all workers will pay 6.2%/7.65% for their wages up to $117,000 and the higher rate for wages over $117,000 up to $123,000. Each year the wage base increases and after ten years in 2024, a worker would be paying 6.2%/7.65% payroll tax for earnings up to $117,000, but 8.2%/9.65% for any amount of earnings between $117,000 and $147,000. Since Tier Three consists of a rolling ten year zone, in 2025, the wage base increases to $150,000 and an earlier year drops out and the portion of earnings subject to the higher 8.2%/9.65%  now fall in the zone between $120,000 and $150,000 thereby preserving a ten year Tier Three zone or range.

The Three Tier system will raise new trust fund revenues without increasing benefits and without scrapping the cap and without creating a situation where either benefit payouts will significantly increase due to drastically increased average earnings or the situation wherein high wage earners who are forced to pay unlimited increases in payroll taxes rise up in opposition to the Social Security program and program confidence is eroded.