Scrap the cap

Several readers have asked, “How much money could we raise if we get rid of the cap on payroll taxes, and make the rich pay their fair share? Would it be enough to save Social Security?”

What is the cap? Social Security is financed on a tax of 12.4 percent (split between you and your employer), which is taken out of your paycheck. But there is a cap — you only pay tax on the first $90,000 you make in a year. And income from interest, dividends and capital gains pays no tax at all.

Most of us never run into the cap. We make a lot less than $90,000 a year, and our investment income doesn’t add up to a hill of beans. But for corporate CEOs, the cap means big savings.

In 2003, CEO Carly Fiorina of Hewlett Packard, got over $6.8 million in compensation. She paid Social Security tax for the first four days of January. By then, her total pay had reached $90,000, and she was free of payroll tax for the rest of the year. It took Jerry Grundhofer of U.S. Bankcorp only two days, and L.R. Raymond of Exxon Mobil one day to reach the cap. Steve Jobs of Apple Computer was finished with payroll tax before lunch on Jan. 2.

Fred Gaboury, labor correspondent for the People’s Weekly World until his death last year, used the slogan, “Scrap the cap — Let the rich pay Social Security.” It is a popular slogan, and brings us back to the original question: how much money is involved here?

Answer: If the 12.4 percent payroll tax was applied to all income, regardless of source or cap, it would raise an additional $265 billion per year.

One of the valid criticisms of Social Security is that it is financed through a regressive tax. This means that the 12.4 percent payroll tax weighs most heavily on low-income workers and, as we have seen, those with very high incomes hardly notice it. (By the way, privatizers will bring this up when they attack Social Security, but their private accounts keep the same regressive financing).

The first step in making the payroll tax progressive instead of regressive is to scrap the cap. The second step would be to exempt the first $10,000 of income from the worker’s share of the payroll tax. This would be a tax cut of $620 a year for all workers, equivalent to a wage increase of 35 cents per hour. Minimum wage workers would pay little or no tax, while corporate CEOs would pay their full share. The cost would be $95 billion per year.

Another argument against Social Security is that it doesn’t pay enough, leaving too many people near or below the poverty line. This is easily fixed by increasing benefits. Social Security remains the main resource, often the only resource, for the majority of seniors With company pension plans failing, and personal savings being swallowed by medical expenses, college costs, mortgages and bouts of joblessness, reliance on Social Security is likely to increase.

How much can we raise benefits? Let’s do the math:

• By scrapping the cap, and applying the 12.4 percent payroll tax to all income, we gain an extra $265 billion per year.

• We spend $95 billion by refunding the worker’s share of the payroll tax from the first $10,000 of wages.

• This leaves us with $170 billion. We use that to increase Social Security benefits by one-third.

We don’t need to scrap the cap to save Social Security. It’s in good financial shape for the foreseeable future. Social Security is in danger, not because it is running out of money, but because it is running into vultures who want to kill our retirement security so they can feast on the carcass.

But Social Security can be improved with fairer financing and higher benefits. The “scrap the cap” program can help build a big, powerful, angry political movement to stop the Bush administration from wrecking Social Security. The subject is developed further by Gaboury’s article which can be found at www.pww.org/article/articleprint/1506.

economics@cpusa.org