Should We Redesign Payroll Taxes?

Currently we have a bizarre tax system where workers and employers both contribute equally to payroll taxes to pay for social security and medicare. On its own, this isn't necessarily a bad thing. These are programs that do a lot of good and provide for people in retirement. Here's the problem: these payroll taxes do not apply to those who make a living off of investments, and they also do not apply to those who make more than a certain amount of money. Here's where it gets even worse, if you are self-employed, you are effectively playing twice the tax, since you are the employer and employee.

What we've set up is a tax scheme that effectively discourages labor, discourages entrepreneurship, and encourages only investment. On top of that, it's not solvent. So we need to change it. Here's my proposal?

Let's stop treating this like a savings account and treat it like it actually is: social welfare. Make the tax apply to high income earners, not just middle income earners. Make it apply not just to wage income, but to all sources of income. This does mean that yes, now the rich can collect social security, but we already a maximum benefit worked into the system, so on net we'll be collecting much more revenue.

This fix will treat all sources of income equally and fix the budget issues.

Thoughts?

Do you also want to take the cap off Social Security benefits? Right now you can only make just so much in SS benefits so if we make sure that a high wage earner pays SS tax on all of his or her income are we then going to adjust the SS benefit so that they can receive a benefit commensurate with what they paid in?

Lutherf said:

Do you also want to take the cap off Social Security benefits? Right now you can only make just so much in SS benefits so if we make sure that a high wage earner pays SS tax on all of his or her income are we then going to adjust the SS benefit so that they can receive a benefit commensurate with what they paid in?

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No, keep the cap as it is. Social Security should not be paying for a luxurious lifestyle.

phattonez said:

No, keep the cap as it is. Social Security should not be paying for a luxurious lifestyle.

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Why confine the proposed changes to the “payroll” taxes. The entire program needs work; wasn’t Trump going to make the tax form fit on a 3x5” card?

phattonez said:

1) No, keep the cap as it is. 2) Social Security should not be paying for a luxurious lifestyle.

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1) As it is, the amount of FICA 'contributions' determines the level of SS retirement benefits - since 'contributions' are capped then so are SS benefits.

2) It does not now and 50% to 85% of SS benefits are taxable (thus effectively reduced) for those with significant other retirement income.

phattonez said:

No, keep the cap as it is. Social Security should not be paying for a luxurious lifestyle.

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So if you make good money and pay into Social Security your benefit will be capped. Basically, you just want to take someones wages and hand them to other people.

Why should I pay SS tax on a half million dollar salary if my benefit will be capped at $48k/yr? How is that fair and why would I possibly agree to such terms?

Lutherf said:

So if you make good money and pay into Social Security your benefit will be capped. Basically, you just want to take someones wages and hand them to other people.

Why should I pay SS tax on a half million dollar salary if my benefit will be capped at $48k/yr? How is that fair and why would I possibly agree to such terms?

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To be fair, the OP said to call it what it would be: social welfare.

Lutherf said:

Do you also want to take the cap off Social Security benefits? Right now you can only make just so much in SS benefits so if we make sure that a high wage earner pays SS tax on all of his or her income are we then going to adjust the SS benefit so that they can receive a benefit commensurate with what they paid in?

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Sure. But they wouldn't go for that either.

You know that.

Lutherf said:

So if you make good money and pay into Social Security your benefit will be capped. Basically, you just want to take someones wages and hand them to other people.

Why should I pay SS tax on a half million dollar salary if my benefit will be capped at $48k/yr? How is that fair and why would I possibly agree to such terms?

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That (bolded above) is what any 'pay as you go' system does - what the OP wants is simply to make "the rich" pay far more than they could ever get back. As retirees live longer and fewer workers are 'contributing' to support each of them then the flat FICA tax rate must be raised, 'promised' benefits must be cut and/or general revenue used to cover the 'pay as you go' FICA revenue shortfall.

Skeptic Bob said:

To be fair, the OP said to call it what it would be: social welfare.

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If our goal is to promote social welfare then why allow wages to be paid to begin with? Why not just have a government agency determine what everyone should be paid for their service and distribute that amount every 2 weeks? It would save all kinds of compliance issues if all businesses, instead of paying wages, just sent their weekly profit to the government for proper distribution. Nobody would have to pay tax because because they would have no income. All they'd have would be a government stipend.

I'm not sure how that would work with self-employed people but if we just prohibited self-employment that problem would go away.

phattonez said:

No, keep the cap as it is. Social Security should not be paying for a luxurious lifestyle.

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Be honest! You would like to tax the rich until they are no longer rich!

Lutherf said:

If our goal is to promote social welfare then why allow wages to be paid to begin with? Why not just have a government agency determine what everyone should be paid for their service and distribute that amount every 2 weeks? It would save all kinds of compliance issues if all businesses, instead of paying wages, just sent their weekly profit to the government for proper distribution. Nobody would have to pay tax because because they would have no income. All they'd have would be a government stipend.

I'm not sure how that would work with self-employed people but if we just prohibited self-employment that problem would go away.

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I imagine because most people would hate that and it would stifle ingenuity. Many people may hate what the OP proposes, but I don’t see it stifling ingenuity.

Skeptic Bob said:

I imagine because most people would hate that and it would stifle ingenuity. Many people may hate what the OP proposes, but I don’t see it stifling ingenuity.

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None of what I suggested would stifle ingenuity. It would just change the focus of ingenuity from producing things to avoiding taxes.

Interesting topic. On another forum, I got an introduction to the American payroll tax system. Definitely more complicated than Canada's.

In Canada, workers have four basic deductions from their pay:
1) Federal tax (progressive)
2) Provincial tax (progressive)
3) Canada pension (employer matches that that amount)
4) Unemployment Insurance (employer matches 1.4 x the employee amount).

The worker usually sees 1 & 2 as one entity on the payroll tax; i.e. there is no differentiation between federal and provincial tax, just one "income tax" entry. Generally speaking, the highest marginal tax rate is about 50% and kicks in at about $200,000 a year. Most workers are not very knowledgeable on how their taxes are calculated.

The worker usually not see the employer contribution to 3 & 4. However, the 3 & 4 are capped, so high income earners are not "taxed" on there incremental income above those thresholds.

When I had my own business, I did all my payroll calculations. It really was not that difficult. But add in a few more accounts--like it seems to be in the American system--then some expertise needs to be hired.

Companies that provide benefit packages for employees probably double their costs to administer payroll.

As most health care is paid by the provincial governments, there is no tax collected directly to pay for it. But the funding comes indirectly from other tax sources, some of which are the provincial taxes and federal government transfers to the provinces for health care. As byzantine as financing the Canadian health care system may be, it is still a lot simpler than the plethora of private insurance companies operating in the USA, coupled with the various social programs. We manage to heal a lot of people, and hospitals don't shut their doors for lack of money.

Maybe there is something to be learned from the Canadian example.

Rexedgar said:

Why confine the proposed changes to the “payroll” taxes. The entire program needs work; wasn’t Trump going to make the tax form fit on a 3x5” card?

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Yes it just two words, “They get a new one page form to send the IRS saying, "I win”

Lutherf said:

It would just change the focus of ingenuity from producing things to avoiding taxes.

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Alright, THAT made me laugh.

Reminds me of when my mom used to say, “ If you put as much time and energy into doing your homework and chores as you put into avoiding them you would be finished already!”

She was right, of course.

Rexedgar said:

Why confine the proposed changes to the “payroll” taxes. The entire program needs work; wasn’t Trump going to make the tax form fit on a 3x5” card?

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One issue at a time, please.

ttwtt78640 said:

1) As it is, the amount of FICA 'contributions' determines the level of SS retirement benefits - since 'contributions' are capped then so are SS benefits.

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I understand, but let's look at the reality of the situation. Low to middle income workers get a far higher percentage of their income taken in payroll taxes, and they're stuck "investing" in a fund that offers a terrible return. High income earners pay a lower percentage and can invest that money, earn a better return, and pay even lower taxes on those investments.

Let's call that what it is: a wealth transfer from poor to rich.

2) It does not now and 50% to 85% of SS benefits are taxable (thus effectively reduced) for those with significant other retirement income.

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I know it doesn't, but I was anticipating some who might retort that my idea would subsidize a luxurious lifestyle for the rich.

Lutherf said:

So if you make good money and pay into Social Security your benefit will be capped. Basically, you just want to take someones wages and hand them to other people.

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This is exactly how social security works now. My wages are handed to those who are retired.

Why should I pay SS tax on a half million dollar salary if my benefit will be capped at $48k/yr? How is that fair and why would I possibly agree to such terms?

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This is how our entire tax structure works. Are high income earners using more government service than low income earners? No, it's the opposite, yet everyone gets taxed (and the rich get even higher rates than the poor).

ttwtt78640 said:

That (bolded above) is what any 'pay as you go' system does - what the OP wants is simply to make "the rich" pay far more than they could ever get back. As retirees live longer and fewer workers are 'contributing' to support each of them then the flat FICA tax rate must be raised, 'promised' benefits must be cut and/or general revenue used to cover the 'pay as you go' FICA revenue shortfall.

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This seems like a far more equitable solution than making poor people work more.

Lutherf said:

If our goal is to promote social welfare then why allow wages to be paid to begin with? Why not just have a government agency determine what everyone should be paid for their service and distribute that amount every 2 weeks? It would save all kinds of compliance issues if all businesses, instead of paying wages, just sent their weekly profit to the government for proper distribution. Nobody would have to pay tax because because they would have no income. All they'd have would be a government stipend.

I'm not sure how that would work with self-employed people but if we just prohibited self-employment that problem would go away.

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:roll: Talk about a straw man.

Crystal said:

Be honest! You would like to tax the rich until they are no longer rich!

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Not true at all. I'm fine with people earning high incomes. For instance, I have no problem with doctors being paid hundreds of thousands per year.

I'm not fine with wealthy investors making millions of dollars per year for parking their money in the right vehicles, but that's a different story.

Lutherf said:

None of what I suggested would stifle ingenuity. It would just change the focus of ingenuity from producing things to avoiding taxes.

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Are you for some reason under the impression that avoiding taxes isn't already the focus?

phattonez said:

I understand, but let's look at the reality of the situation. Low to middle income workers get a far higher percentage of their income taken in payroll taxes, and they're stuck "investing" in a fund that offers a terrible return. High income earners pay a lower percentage and can invest that money, earn a better return, and pay even lower taxes on those investments.

Let's call that what it is: a wealth transfer from poor to rich.



I know it doesn't, but I was anticipating some who might retort that my idea would subsidize a luxurious lifestyle for the rich.

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That (bolded above) is true of any flat rate tax system such as sales and excise taxation. Since SS is a 'pay as you go' system there is no money to be 'invested' - FICA payroll taxes are collected from current workers and paid to support current retirees (or their surviving spouses). SS is a 'wealth transfer' system but from the working to the (elderly) retired and, as you originally noted, half is paid by the employer who is often quite rich. If you wanted to 'fix' SS in a much more progressive manner then simply make up any shortfall with general revenue which is largely from the already quite progressive federal income tax revenue.

phattonez said:

Not true at all. I'm fine with people earning high incomes. For instance, I have no problem with doctors being paid hundreds of thousands per year.

I'm not fine with wealthy investors making millions of dollars per year for parking their money in the right vehicles, but that's a different story.

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Why not? They earned the money and paid taxes on it, why can’t they invest it if they want to without being double taxed?