Idea of the Day: Eliminate the Employer Social Security Payroll Tax Cap

May 7, 2008

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Under current law, Social Security is financed through the payroll tax system that places shared responsibility on workers and business. Employees and employers each pay taxes on wage income equal to 6.2 percent—up to a threshold(currently $97,500). Because of this payroll tax cap, businesses and employees pay a lower effective tax rate on earnings above $97,500.

We propose eliminating the payroll tax cap on the employer side to make businesses pay Social Security taxes on all of the income of the highest paid employers, just like they do for those earning less than $97,500. This is the fairest way to help shore up the finances of Social Security. This change would impact the taxes that businesses pay for only the top 6.5 percent of earners (couples and individuals), yet would yield significant additional revenue to reduce the deficit and bring the Social Security system closer to solvency.

According to the Social Security and Medicare Board of Trustees, the longrange, 75-year actuarial deficit is equal to 1.95 percent of taxable payroll. Eliminating the cap on both the employer and employee side would be more than enough to bring the system into long-range balance. Removing the cap on the employer side would thus go a long ways toward restoring solvency as well as help ensure greater progressivity and fairness in the payroll tax.

For more on the Center's policies on tax reform, please see:

• Responsible Investment: A Budget and Fiscal Policy Plan for Progressive Growth by David Madland and John Irons