Payroll Taxes Should be Cut

The payroll tax is withheld from every worker’s paycheck to fund Social Security and Medicare Part A (which covers hospitalizations). When payroll taxes are withheld, 6.2 percent of wages go to Social Security and 1.45 percent fund Medicare Part A. In total, most workers have 7.65 percent of wages withheld for Social Security and Medicare Part A.

There is an earnings cap on the amount of income subject to the 6.2 percent Social Security tax. In 2017, only the first 127,200 dollars of income are subject to the Social Security tax. Every dollar of income is subject to the 1.45 percent tax for Medicare Part A.

If your income is less than $127,200, you pay 6.2 percent of your income to Social Security. If you earn exactly $127,200 you pay $7,890 to Social Security. Thanks to the earnings cap, you pay the same $7,890 to Social Security if your income is one million dollars. If the cap was eliminated and everyone paid 6.2 percent of their entire income to Social Security, a person earning one million dollars would pay $62,000. If you earn a million dollars, the earnings cap saves you $54,110.

Obviously, a system that allows a millionaire to pay a much smaller percentage of their income to support Social Security than someone earning $30,000 pays is a broken system.

I propose we eliminate the earnings cap. Then, we use the massive increase in revenue to drop the percentage owed. In a better world, we would also make the payroll tax fairer by charging the wealthy a higher percentage of their income. Given that eliminating the cap has almost no chance of passing Congress, let’s stick with proposing that and decreasing the percentage.

If the percentage owed for Social Security was dropped from 6.2 percent to four percent every paycheck would be larger. Under the current 6.2 percent, someone with an income of $50,000 pays about $3,100 to Social Security. If the amount owed Social Security was reduced to four percent that person would pay $2,000. This means that reducing the rate from 6.2 percent to four percent would save a worker with an income of $50,000 about $1,100 a year. Assuming two paychecks a month, that worker would get roughly $45.83 cmore in each paycheck. The difference could be the cost of a monthly cell phone bill. The monthly total of more than 91 dollars could pay a gas or electric bill.

Any proposal that is serious about helping the middle class would include a reduction in the payroll tax. Reducing the payroll tax would give people more money every paycheck; instead of forcing them to wait for a tax refund. Since people would have more money in each paycheck, many of them would spend more money during the year. By giving people more money to spend, we would also be stimulating the economy.

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