How Democrats Would Tax High-Income Professionals (Not Just the Mega-Rich)
Correction, November 19, 2019: This article has been revised to reflect the following correction: An earlier version of this article gave an incorrect figure for the share of total earnings that escapes Social Security tax. It fell from 90 percent in 1983 to 83 percent, not 17, in 2016.
Much of the Democratic primary race has focused on taxes aimed at the billionaire class — policies devised to reduce inequality and fund progressive goals on health care and education.
But there’s also a less discussed tax increase in leading Democratic policy proposals that would affect not just a tiny sliver of the ultra-wealthy, but also millions of high-income workers. For these people, many of them affluent professionals in Democratic strongholds, it would be the biggest tax increase in recent memory.
This year, American workers and their employers owe a combined 12.4 percent on Social Security payroll taxes for income up to $132,900 (rising to $137,700 in 2020). They owe nothing on earnings above that level.
Some Democrats in the thick of the presidential race and on Capitol Hill now seek to change or eliminate that cap — potentially placing a new double-digit tax on high earners, with several plans focusing on earnings above $250,000.
Related video: The wealth tax fight heats up (provided by Reuters)
This would pump vastly more money into Social Security, enabling more generous benefits and helping sustain the finances of a program that could be forced to slash benefits in the decades ahead if nothing is done.
The result would be a large tax increase on high earners, even before other changes a Democratic administration might contemplate, such as increasing income tax rates or taxes on investment income.
In the Obama administration, for example, the top income tax rate was increased by 4.6 percentage points, and a Medicare tax of 0.9 percentage points was placed on high earners to help pay for expanded health coverage. Depending on the details, applying Social Security taxes to high incomes would increase the combined tax owed on each additional dollar of income for top earners by two to three times as much.
And it would eliminate a feature of the Social Security system that has made it politically untouchable through the decades — that the taxes Americans pay in are closely related to the benefits they eventually receive, assuming they live long enough. The top earners facing new Social Security taxes would not see their future benefits rise commensurately; rather it would amount to a transfer from high earners to low- and middle-income Social Security recipients.
“The traditional argument has always been that Social Security is very popular because it’s not seen like a traditional welfare program,” said Kyle Pomerleau, a resident fellow at the conservative-leaning American Enterprise Institute. “What you pay in roughly corresponds to what you get. Once you start taxing certain levels of income without providing additional benefits based on that tax, you are breaking that link.”
As such, the new Democratic approach to Social Security amounts to a test of what affluent liberals are willing to sacrifice to accomplish progressive goals. For a sign of how ostensibly progressive Democrats can recoil at tax changes that affect their pocketbooks, nearly all Democratic senators recently voted to eliminate a cap on the deductibility of state and local taxes. The deductions favor high-income people in high-tax states, and the cap was part of the Republicans’ 2017 tax overhaul.
Elizabeth Warren, who has the most detailed plan, would tax earnings above $250,000 at a 14.8 percent rate, including both the employees’ and employers’ share. This would finance an extra $200 a month in retirement or disability benefits for beneficiaries of Social Security — a 15 percent increase for the average recipient, devised to help lift many retirees out of poverty. It would also expand Social Security benefits for people like widowed spouses and those who worked as caregivers outside the formal work force.Bernie Sanders would also apply the current 12.4 percent combined Social Security tax rate to all income above $250,000. Joe Biden has pledged to increase benefits and solidify Social Security’s finances without detailing exactly what changes to payroll taxes he would use to do so.
A bill supported by a broad coalition of House Democrats would apply the current tax of 12.4 percent to all earnings above $400,000, and gradually raise the combined rate to 14.8 percent.
Ms. Warren’s proposal hasn’t received as much attention and debate as her proposed wealth tax on families with assets of more than $50 million. But her Social Security plan would affect around seven million Americans, compared with the 75,000 that her advisers estimate would be affected by the wealth tax.
“She will extend the program’s solvency by nearly two decades by asking just the top 2 percent to contribute more,” said Saloni Sharma, a Warren campaign spokeswoman. “She will provide a $200 immediate increase in benefits across the board for every current and future beneficiary — the biggest increase in benefits in nearly 50 years.”
Under Ms. Warren’s Social Security plan, and not incorporating any other changes to the tax code, a family with one wage earner making $300,000 a year, for example, would pay an extra $7,400 in tax each year. For each additional dollar earned over that level, total federal tax obligations would rise to 39 cents, up from 27 cents today. (Those numbers include both taxes deducted from workers’ paychecks and those paid by employers, which economists believe are ultimately borne by workers.)
“This is a much bigger deal for more households than the wealth tax,” said Mark Zandi, chief economist at Moody’s Analytics, which analyzed Ms. Warren’s proposal at her campaign’s request. “The wealth tax is a mind shift, opening up a new source of revenue. In terms of the number of people impacted, this is much bigger.”
For those making millions of dollars and living in a high-tax location like New York City, the combined marginal tax rate — including federal income tax, Medicare and Social Security tax, and state and local income tax — would be about 63 percent. Sweden currently has the highest top overall marginal tax rate among rich nations, at 60.1 percent, according to the Organization for Economic Cooperation and Development.
Moreover, the Warren and Sanders plans would apply Social Security taxes to investment income for the first time, not just to earnings. That would make it harder for high-income people to avoid taxes by reclassifying their labor income as business income. This has the potential to reduce the accumulation of savings, and over time reduce investment in the economy.
Higher Social Security benefits are popular in public opinion polls. The tax increases proposed by Ms. Warren or Mr. Sanders would apply to a slim minority of earners: 4.6 percent, according to Moody’s Analytics.
Moody’s data also shows that the higher taxes would be paid disproportionately in Democratic-leaning states. The 12 states with the highest share of earners who would owe higher taxes all voted for Hillary Clinton in the 2016 election, led by New Jersey, Connecticut and Massachusetts.
“People who live in affluent areas and are making good money, are they going to jump with glee over paying more taxes?” said Representative John Larson, a Connecticut Democrat who is author of the congressional Democrats’ plan to expand Social Security benefits. “I can’t argue in good faith that people are sending me love notes from wealthy suburban counties.”
But, he argued, people who have enjoyed high incomes will be willing to pay higher taxes to ensure that the Social Security system remains financially viable and that beneficiaries receive an adequate income.
“Are we prepared to look people in the eye and tell them that with the enormous wealth disparity we have that people who have worked all their lives shouldn’t be able to sustain themselves with dignity?” Mr. Larson said.
In effect, these proposals would raise taxes substantially on the people who have been the big winners in the 21st-century economy — high-income professionals who are disproportionately located in affluent coastal areas — and redistribute it to middle-income people nationwide.
Over recent decades, the share of total earnings that escapes Social Security tax has risen — a reflection of rapidly rising earnings at the top of the income scale. In 1983, 90 percent of earnings were subject to Social Security taxes; the rate fell to 83 percent in 2016, according to the Congressional Budget Office.
In some ways, the new Democratic proposals are intended to reverse that trend, by disproportionately taxing more of their own voters’ paychecks.
“The goal is to provide economic security, so the first question is what level do we want and what is the fairest way to distribute the cost,” said Nancy Altman, president of Social Security Works, which advocates expanding benefits. “Given income and wealth inequality in the last few decades, I think all of these proposals make sense.
“The question is how to spread the cost while not undermining the basic structure of the program.”
In particular, she noted, even people with incomes well above current cutoffs would see expanded Social Security benefits (though not in proportion to their higher earnings), and the rate they pay would be the same as for low- and middle-income people.
As the proposals get more focus and as the election debates wear on, a big question for 2020 is how much Democratic loyalists — who would be paying a lot of that bill — will remain behind it.
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