Home » Economy » A Flat Tax Payroll Deduction Might Save Social Security

A Flat Tax Payroll Deduction Might Save Social Security

DATA DRIVEN POINT OF VIEW: Don’t be fooled.  Discussions about raising or lowering Federal Income Taxes has little to do with Social Security and Medicare, which are separately funded by payroll deductions.  Is there a funding crisis for Social Security and Medicare?  A long term problem, yes.  A crisis, no.  Can America continue to afford these programs given the number of baby boomer retirements?  The answer is yes, of course we can.  We are the wealthiest county on Earth.  Nations with far less wealthier already provide their citizens with much more generous benefits.  The reason we feel the funding punch is that the structure we’ve enacted to pay for federal insurance benefits is so regressive.

The table below makes obvious that wealthy Americans currently share almost none of the burden for Social Security and Medicare benefits.  The problem is that wealth is concentrated at the top of the income scale while payroll deductions are disproportionately collected from the bottom of the scale.  We can continue to raise the contribution rates but this only hurts those who earn the least.  We can keep raising the income cap but this only marginally increases the number of people pay into the system.

—  OR  —

We could institute a flat tax for Social Security and Medicare.  The table below shows what this might generate in premiums at the current 7.65% rate of payroll deductions.  This plan would clearly generate more revenue than needed for current benefits.  A flat payroll tax of significantly less than the current 7.65% would be all that is needed to fully fund Social Security and Medicare. It would reduce payroll taxes for the majority of Americans.

Payroll Taxes for Social Security and Medicare
Total Income from Wages
Amount Currently Deducted
Contribution As a % of Income
Contribution if deductions were based on a flat tax
$1,000
$77
7.65%
$77
This Segment Represents 57 million households
$10,000
$765
7.65%
$765
$50,000
$3,825
7.65%
$3,825
$100,000
$7,650
7.65%
$7,650
$500,000
$8,423
1.68%
$38,250
$1,000,000
$8,423
0.84%
$76,500
There are at least 100,000 household in this segment
$10,000,000
$8,423
0.084%
$765,000
$50,000,000
$8,423
0.017%
$3,825,000
$100,000,000
$8,423
0.0084%
$7,650,000
$500,000,000
$8,423
0.0017%
$38,250,000
$1,000,000,000
$8,423
0.00084%
$76,500,000
$10,000,000,000
$8,423
0.000084%
$765,000,000

This table assumes that income from wages for the wealthy are at least $110,100, which is the income cap for 2012, and assumes they are not self-employed. Income from investments are not subject to payroll deductions.  Employers pay an additional 7.65% in payroll taxes for their employees. The self employed also pay corresponding more in payroll taxes for their Social Security and Medicare benefits. Additional payroll deductions for unemployment and disability insurance may also apply in certain states and with certain individual.

These programs exist for everyone, and everyone should contribute according to their means. Those who are fortunate enough not to need the benefits still have a moral obligation to assure a minimal level of care to those less fortunate, and a social obligation to contributed to those who gave a lifetime of labor creating the fabulous wealth that the wealthy have accumulated.

Originally posted 14th June by 
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