I have been thinking about this concept for years. The Social Security tax component has always been subjected to earnings limits. The limit for 2012 is $110,100; for 2013 it is $113,700 unless subsequently modified by Congress. Beyond those limits wage earners pay no additional social security taxes until the following year. The percentage, paid by both employers and employees is 4.2 percent currently and could go back to 6.2 percent if there is no agreement reached between the President and Congress.
The Medicare tax is 1.45 percent with no limitation on earnings.
I used to be what President Obama considers a high-income earner, and usually finished paying Social Security taxes early in the year or by mid-year. I often thought that was inequitable as most earners pay on their total earnings throughout the year.
It seems to me that the Social Security component could be reduced significantly if it applied to all earnings. IRS and Social Security statisticians and actuaries could determine how low it could go to achieve current tax revenue levels, or even to increase the taxes collected.
The result would be a tax reduction for the lower and middle class earners, which would stimulate the economy further. Most high-income earners would be nominally affected. Self-employed individuals currently pay the employer and employee components. They would benefit by twice the reduction, and since most self-employed individuals own small businesses, the stimulating effect to the economy would be significant.
President Obama wants the rich to pay more. Under my proposal, if the basic Social Security tax rate were reduced to, say 2.5 percent on unlimited earnings, an individual currently earning $1,000,000 annually would pay $25,000 in Social Security taxes instead of $7,049.40 at the 6.2 percent of limited earnings rate, which is an increase of about $18,000, or $36,000 for self employed individuals. Such increases are nominal for those income levels, and would not impair the economy or the potential growth.
I also think this proposal could reduce or eliminate the projected Social Security deficit in a number of years.
This concept is so simple that there must be something I overlooked.
The writer lives in Longs.