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Op-Ed Thu Feb 17 2011
This Op-Ed was submitted by John Fitzgerald
In late 2010, Democrats and Republicans in Washington recently reached a grand bargain on the Tax Cuts. Included in the deal is a temporary provision to reduce the Social Security payroll tax to provide working Americans with a little more tax home pay every week, and so spur economic growth. A couple months ago a bipartisan debt commission told us that we need to reform Social Security, lest it lead to massive shortfalls, and eventually bankruptcy, over the coming decades. Thankfully a simple, common sense fix exists to the dual problems of our anemic economic growth and Social Security financing.
First, a brief explanation of how Social Security works. Social Security taxes are levied on both the employee and the employer. The tax rate is 6.2% for both employees and employers. Employees see this deduction on their regular paycheck. They do not see the employer's portion, but this is still, in effect, a tax on the employee's earnings, to the tune of 12.4%.
Amazingly, however, high level earners do not pay this tax on any income over $106,800 a year. (This cap increases slightly each year). So a janitor making $25,000 a year pays an effective social security tax rate of 12.4%. A dentist making $100,000 pays an effective tax rate of 12.4%. But someone making $1,000,000 a year pays an effective rate of only 1.4%.
My simple solution is to cut the rate both employees and employers pay to 5% (so a total of 10% versus the current 12.4%). This means more take home pay for workers every week. It also makes it less expensive to hire new workers, and to retain existing ones.
We would also end the tax cap on earnings, so millionaires pay the same rate as janitors. The breakeven point, where one would pay more taxes under this new scheme is on earnings more than of $120,000. Now, in addition to being a tax cut on more than 95% of earners, and on almost businesses that aren't Goldman Sachs or pro-sports teams, this plan would provide $79 billion a year to support the long term health of Social Security. (Over the next 75 years, in today's dollars, and with annual aggregate wage growth of 2%, we would add $13.5 trillion to the Social Security Trust fund, dwarfing the $5.3 trillion shortfall we have heard so much about.)
This flat tax would no doubt have it detractors. Most assuredly, small and medium sized businesses would be held as one group that would be hurt by this proposal. But a medium sized business with 100 employees earning an average of $50,000 a year would save $60,000. And this does not include the additional $60,000 that would be in the pockets of the workers at this company; money to invest in their kid's education, save for the future, pay down their mortgage, or go on vacation. And it is well documented that the most effective tax stimulus is to put money into the hands of low and middle income workers.
And, of course, familiar refrains will be heard about penalizing the "most successful" amongst us. I have no specific qualm with hedge fund managers or firstbasemen. But it strikes me as foolhardy to hamstring small businessmen and women, and over tax workers, so that millionaires can afford ivory back scratchers. This helps no one, save ivory dealers.
So, to recap, lower taxes for workers and businesses and a real fix for Social Security. We can cut benefits for the elderly, throwing grandma and grandpa out on the streets, or we can do something, real, now.
Spreadsheet with calculations here.
John Fitzgerald is a former union organizer and financial analyst, making him a freak. He has a firm grasp of basic arithmetic and loves his country. He has lived in Chicago for 7 years.