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Taxing the rich is a big topic in Washington these days.
President Joe Biden recently proposed in his annual budget for 2023 the so-called minimum income tax billionaire, which will increase fees from the richest families in the country.
Under the plan, people with a net worth of $ 100 million or more will face a 20% tax on their full income, including unrealized price increases.
But another proposal that has revolved around Capitol Hill – raising taxes on high wages, earning $ 400,000 and up a year – has not been mentioned in Biden’s budget, and it could help address social security funding.
Social insurance is funded by payroll taxes, which in 2022 will cover wages of up to $ 147,000. Both the employer and the employee contribute 6.2% of wages to this income threshold, which is adjusted annually.
A recent proposal by Congress aims to apply this payroll tax to salaries of $ 400,000 and above, among other changes, to bolster the program.
The watch is of interest to lawmakers making changes to ensure the program can continue to pay benefits as promised. The Board of Trustees of the Social Security believes that the funds may be exhausted in 2034, and at this point 78% of benefits will be paid.
To strengthen the system, leaders are faced with a choice: cut benefits through changes such as raising the retirement age, raising taxes, or a combination of both.
Applying social security payroll taxes to those in excess of the payroll base is a popular idea in the public, and even has its own “Take Off the Hat” campaign slogan, ”said Nancy Altman, president of Social Security Works.
Once an employee exceeds the social security tax threshold from the first $ 147,000 of their annual salary, their salaries are no longer subject to that tax.
As a result, workers who exceed the wage threshold can pay taxes on social security wages only for part of the year.
“A lot of people don’t even know there’s a maximum, and when they find out, they think the law needs to be changed to make everyone pay all year,” Altman said.
The 1.45% Medicare tax also applies to wages. Combined with Social Security this is 7.65% of the tax paid by both employees and employers, and is known as FICA, which means the Federal Insurance Contributions Act.
It should be noted that there is no wage limit for Medicare tax after Congress repealed it starting in 1994.
Today, lawmakers could make the same changes to social security. They could also opt for a tax rate increase of 6.2%.
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Democrats have proposed re-applying a tax on social security wages starting at $ 400,000. Income up to $ 147,000 will still be taxed. Then a hole or gap would be formed where taxes would no longer be applied until wages reached $ 400,000 and the tax was recalculated.
According to Kathleen Romig, director of social security and disability policy at the Center for Budget and Policy Priorities, lawmakers may include more wages in the payroll tax.
This may include simply applying a tax on all salaries above $ 147,000.
In addition, they could create a tax specifically for higher wages and possibly reduce the benefits they receive.
Lawmakers could also apply social security payroll taxes to programs that didn’t exist when Congress last considered the issue, such as transit subsidies or flexible expense accounts.
Since the restriction was imposed, wages at the top have grown much faster.
Taxes on social security wages initially covered about 90% of wages. To cover this level of wages, the limit should be around $ 270,000, according to 2016 estimates.
“Just keeping up with rising wage inequality in this country, not to mention other forms of inequality, is bridging much of the funding gap,” Romig said.
The longer Congress waits to take action, the less likely it is that raising the tax base on wages alone will be enough to address common social security funding issues.
According to Joe Elsaser, founder and president of Covisum, a social security company claiming to be software once was enough to fix the deficit.
Now, even if all wages are taxed, it only covers 60-70% of the deficit, he said.
“Every year we postpone reforms, the cost of ensuring that tax revenues from current employees meet their needs indefinitely is growing,” Alsace said.
The increase in taxes that workers have to pay raises questions about intergenerational justice, he said.
“Is it fair to force the next generation to support their parents, which is what actually happens when you increase the payroll tax to fund benefits for current retirees?” Said Alsace.
If the wage tax rate is shifted above 6.2%, it will mean lower wages for workers.
“In terms of individual planning, the challenge is not to allow this to crowd out your own retirement savings,” Elsaser said.