Uncapping the Social Security Tax
Other countries have much higher uncapped payroll taxes.
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The United States has two major payroll taxes that are dedicated to specific welfare state programs: the Medicare Tax and the Social Security Tax.
The employee side of the Medicare tax is 1.45 percent of earnings between $0 and $200,000 and 2.35 percent for earnings beyond $200,000. The employer side of the Medicare tax is 1.45 percent of all earnings.
The employee side of the Social Security tax is 6.2 percent of earnings below $160,200. The employer side of the Social Security tax is also 6.2 percent of earnings below $160,200.
In discussions about Social Security reform, one common progressive proposal is to “uncap” the Social Security tax. In concrete terms, this means that the 6.2 percent employee-side tax and 6.2 percent employer-side tax would be applied to all earnings, not just earnings below $160,200.
This proposal is often dismissed as extreme, but, even if this reform is made, US payroll taxation would still significantly lag payroll taxes in many of our peer nations.
The below graph shows the payroll tax rates on top incomes for every country in the OECD that has an uncapped payroll tax.
As in the US, these countries nominally assess their payroll taxes as being charged to either employers or employees. But it is generally accepted that, over the longer run especially, all payroll taxes really come out of worker wages, regardless of how they are statutorily described.
In order to get an apples-to-apples comparison of payroll taxes across countries, it is necessary to normalize the treatment of employer-side and employee-side payroll taxation. This can be done by calculating payroll taxes as a percent of labor costs. The formula for this calculation is: (employer-side payroll taxes + employee-side payroll taxes) / (wage + employer-side payroll taxes). The following graph provides this figure.
In this graph, the red bar shows how much the payroll tax applied to top incomes would increase in the US if the proposal to uncap Social Security taxes was enacted. In this scenario, the payroll tax rate applied to top incomes would still lag Norway, Sweden, and Belgium, among others, and only slightly exceed France, Ireland, and the UK.
Of course, pulling one tax out of an overall tax system for this kind of comparison has its limitations. A country may have a high payroll tax but have lower income taxes, wealth taxes, and consumption taxes. Or a country may have a low payroll tax but have higher taxes of other sorts.
Even overall tax systems are not necessarily useful to compare across countries because taxes are just one way to steer the final distribution of income. Some countries may rely more on the tax system to achieve income distribution goals while others may rely more on non-tax compulsory payments or “predistributive” policies that alter the distribution of factor payments.
When analyzed in terms of the totality of the US income distribution system, it is very clear that, relative to what we see in our peer nations, the disposable income shares of Americans individually earning more than $160,200 per year are so high that trimming them down a bit by uncapping the Social Security tax would not result in them having unusually low disposable incomes.
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