Why do Social Security and Medicare need to be regressive taxes?

We all start paying Social Security (SS) and Medicare taxes on the first dollar we make. The current tax rate for social security is 6.2% for the employer and 6.2% for the employee, or 12.4% total. The current rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total. Or 7.65% for employees or 15.5% for self-employed1.

We always hear about how our income taxes are progressive, but this is largely offset by the regressive SS and Medicare taxes.

Whenever the pundits discuss taxes they only refer to income taxes, not Social Security and Medicare.   So, from day-one the lowest paid individual is taxed 7.65% —  not zero as others would have you believe.

The median hourly wage—the wage at which half the workforce is paid more and half the workforce is paid less—stands at $19.33 per hour. For a full-time, full-year worker, this would translate into about $40,000 per year2.

It would be more equitable if the SS and Medicare taxes started at a higher income level and is collected above that income until the annual SS and Medicare funding targets are reached.  This could be estimated ( percentage and start and end income levels) at the end of the year prior.

In 2019, $944.5 billion (89 percent) of total Old-Age and Survivors Insurance and Disability (OASDI) Insurance income came from payroll taxes. The remainder was provided by interest earnings $80.8 billion (7.6 percent) and revenue from taxation of OASDI benefits $36.5 billion (3.4 percent)3.   The hospital insurance (HI) program, or Part A of Medicare taxes totaled $277.6 billion4.

For 2020, maximum taxable earnings for SS taxes are $137,7004.

In 2019, OASDI taxes totaled about $914 billion and represented 26.4 percent of total federal receipts4.

What if we started collecting SS and Medicare taxes at 3 times the median National income level and above?  Below is a chart showing percent of worker by income group5 plus the current and proposed SS income taxes by group.

This would remove the largest taxes (other than sales taxes) that are hitting the least able to afford it.

To make SS and Medicare taxes even more fair, it would make sense to include Capital gains above the median National income as well.  Why should people that do not need to work be able to skip SS and Medicare taxes?  If you stay, you need to pay.

1. https://www.irs.gov/taxtopics/tc751

2. https://www.epi.org/publication/swa-wages-2019/

3. https://www.ssa.gov/news/press/factsheets/HowAreSocialSecurity.htm

4. https://www.taxpolicycenter.org/briefing-book/what-are-major-federal-payroll-taxes-and-how-much-money-do-they-raise


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