Saving Social Security through simple tax reform
Planning for the coming crisis
Gordon L. Weil
Tax reform. Everybody
talks about it but nothing happens.
President Trump might disagree. After all, taxes were cut for the wealthiest
sliver of the population and partially removed on tips. Unlike traditional Republicans, he does not promote
tax cuts to trickle down to create jobs; it’s simply a reward to the rich.
Trump’s critics say that everybody ought to “pay their fair
share.” Billionaire Warren Buffet says he
pays at a lower rate than his secretary.
Paying his “fair share” would increase his taxes. If the people like him are not taxed appropriately,
the cost of government boosts the public debt, ultimately raising the tax tab through
inflation.
Government spending could be reduced. Social Security benefits will automatically
be less without reform. In 2032, its
retirement reserve fund will be gone and payroll taxes will only cover 78
percent of benefits, which would have to be cut. There’s a surplus of talk about the problem and
a deficit of action. The clock ticks on.
The 1986 tax act produced real reform. Taxes were simplified, loopholes were
eliminated, and rates were reduced. Then,
with the help of Congress, the big players went to work gaming the new rates
and cutting their taxes. Simplification
was lost, together with real reform.
Renewed tax reform could recover some of the 1986 progress.
Taxes could be simple, with fewer loopholes – deductions, exemptions
and special rates. Revenues could
increase with lower rates. Administering
the tax system would cost less. The
wealthiest would pay their fair share, supporting government services from
which they benefit. But the wealthiest
would get around a new round of tax reform.
What worries some people about the talk of tax reform is the
language of the most aggressive would-be reformers. Advocates make the system sound so deeply unfair
today, that confiscating wealth would be justified. These extreme reformers attack
“oligopoly.” In turn, they are attacked
as “socialists.” The result? Talking about tax reform makes a lot of
people feel uneasy.
The temperature of the debate could be lowered by learning a
couple of lessons from the current tax system.
Trump falsely claims that he eliminated taxes on Social
Security. Instead, he successfully added
a limited, three-year tax cut for many seniors, which he claimed cancelled the
tax on their benefit payments. Though it
did not fully cover the tax, Trump successfully sold the temporary measure as a
major Social Security reform. Marketing
matters.
Social Security contributions are paid at the source. The party that pays a person’s income also
pays the Social Security contribution for itself and the recipient directly to
the government. It’s a flat rate, with
no loopholes. The contribution base is
capped at a specific income ($184,500 in 2026); any higher payroll income is
free from any contribution.
Social Security can be saved and taxes reformed with no
increase for more than 90 percent of taxpayers by a simple reform. It would not touch the Internal Revenue Code
and could readily be adopted by Congress.
The cap on income subject to a Social Security contribution
should be eliminated and the definition of income should be changed. Income to any taxpayer from any source could
be subject to the contribution.
The Social Security contribution is now based only on wages
paid to individuals. The base could
include all income paid for wages, government payments and investments. That way, tax evasion by failing to accept a
wage could be avoided.
The annual amount of U.S. personal income above $200,000 is
estimated at $7.5 to $8 trillion. The Social
Security self-employed tax
rate of 12.4 percent would produce about $1 trillion a year from
individuals. That would cover the Social Security shortfall, with the surplus going
into general federal revenues to fund debt payments, tax cuts or increased
benefits.
(Medicare contributions are not subject to an earnings cap.)
This reform would increase taxes on the wealthiest without allowing
loopholes. With payments to the
government coming directly from the source, the taxpayer would not take any
action. Benefits need not be changed.
Companies could also be made subject to making Social
Security and Medicare contributions on their retained profits. No loopholes
would be available. If corporations have the rights of individuals, they should
be treated like them and be contributors.
These contributions would have to be meshed with existing corporate
taxes.
Major individual and corporate contributors might argue that
higher taxes thwart their investment in growth.
Economic
studies question that argument.
This reform could be marketed, à la Trump, as “Save Social
Security,” reassuring lower-income recipients and getting an indecisive
Congress off the hook. Social Security
already has elements of income redistribution, so the reform would be doing nothing
new.
This could be one way to deal with deficit spending and
Social Security. It’s worth a look.
