Good But Not Good Enough for Social Security

Tom Edsall has a good piece in the New York Times:

Currently, earned income in excess of $113,700 is entirely exempt from the 6.2 percent payroll tax that funds Social Security benefits (employers pay a matching 6.2 percent). 5.2 percent of working Americans make more than $113,700 a year. Simply by eliminating the payroll tax earnings cap — and thus ending this regressive exemption for the top 5.2 percent of earners — would, according to the Congressional Budget Office, solve the financial crisis facing the Social Security system. 

So why don’t we talk about raising or eliminating the cap – a measure that has strong popular, though not elite, support? 

When asked by the National Academy of Social Insurance whether Social Security taxes for better-off Americans should be increased, 71 percent of Republicans and 97 percent of Democrats agreed. In a 2012 Gallup Poll, 62 percent of respondents thought upper-income Americans paid too little in taxes.

And:

The Medicare and Social Security taxes are jointly known as FICA (for Federal Insurance Contributions Act) — or payroll — taxes. The combined FICA taxes are highly regressive. The non-partisan Tax Policy Center found that the poorest quintile pays a 7.3 percent FICA rate, while the top quintile pays 6.8 percent. The top 1 percent of the income distribution pays a 2 percent rate, and the top 0.1 percent pays just 0.9 percent. In other words, the rate paid by the poorest quintile is 8.1 times as high as the rate paid by the top 0.1 percent. 

But he doesn't explain why this is, or what should be done about it. Fortunately, we do.

The magic words are “unearned income.” The 1% have pulled off a brilliant con over last 30 years, where they’ve been able to convince the government that unearned income – the kind that comes from capital gains, dividends and interest – should not be subject to the kind of taxation that the rest of us face. In terms of income tax, long term capital gains are taxed at 15%, far below the current maximum marginal rate of 35%.

But it gets worse in terms of Social Security, because these things have ... never been taxed at all.  

In 2009, the IRS reported that there was nearly $7.7 trillion in income, $5.7 of which was salaries and wages. Now, just because something isn't salaries and wages does not necessarily mean it would qualify as "unearned income," but it does give us a sense of scale. If only half of it was -- $1 trillion -- then applying the 2009 employee Social Security rate of 6.2% would yield an additional $60.2 billion in revenue.

And all of this increase would be on income -- literally -- that no one worked for. 

Remember that Romney guy and his taxes?

Mitt Romney offered a partial snapshot of his vast personal fortune late Monday, disclosing income of $21.7 million in 2010 and $20.9 million last year — virtually all of it profits, dividends or interest from investments.  

None came from wages, the primary source of income for most Americans. Instead, Romney and his wife, Ann, collected millions in capital gains from a profusion of investments, as well as stock dividends and interest payments.

The New York Times did end up finding about $710,000 in earned income. So Romney ended up paying $42,000 in FICA taxes on income of $42 million, or about 0.1%. If there were no cap and all income were taxes, he would have paid out about $6.1 million. Which he can afford.