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News Releases on Taxes

January 18, 1999

January 18, 1999 | News Releases on Taxes

Ending Social Security "Earnings Cap" Would Impose Biggest Tax

WASHINGTON, JAN. 18, 1999-In their quest to stave off Social Security's bankruptcy, some policymakers have called for raising payroll taxes yet again. But a new Heritage Foundation study shows that one such proposal-eliminating the cap on how much of a worker's income is subject to Social Security taxes-would saddle Americans with the largest tax increase in history.

Under current law, Social Security is funded by a payroll tax of 12.4 percent on the first $72,600 of a person's income. Making the payroll tax apply to all income would result in a tax increase of $425.2 billion over five years, according to Heritage analysts Gareth Davis and Mark Wilson.

The analysis by Heritage's Center for Data Analysis also shows that eliminating the earnings cap would:

Increase the top federal marginal tax rate to 54.9 percent, its highest level since the 1970s;

Reduce the family income of 23.4 million Americans by an average of $9,147 in the first year after the cap is removed; and

Weaken the economy by reducing personal savings by $34.4 billion in 2004 alone.

All this, Davis and Wilson say, for a plan that would not even accomplish its presumed goal of saving Social Security from bankruptcy. "Completely removing the maximum taxable amount beginning in 1999 only extends Social Security's financial lifetime from 2013 to 2019," they write. Social Security would also continue to run a deficit-$240 billion in 2046 instead of $300 billion under current law.

Nor would the proposal enable Social Security to pay full benefits. For example, a 19-year-old who retires at age 67 in the year 2046 can expect 73 cents for every dollar of promised benefits under the current earnings cap. If the cap is eliminated, the analysts say, that worker can expect just 79 cents for every dollar of promised benefits.

If raising taxes were the answer, Davis and Wilson say, it would have worked before. But Congress has raised Social Security taxes 24 times-an average of once every two years-since the program was established in 1937. In 1982, for example, the "Tax Equity and Fiscal Responsibility Act" was supposed to restore Social Security to permanent solvency, but a mere 16 years later the system again faces bankruptcy, they note.

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