This morning, I put up a brief post commenting on the confusion over the implications of raising or removing the income cap on the assessment of the Social Security payroll tax. But more was left unsaid than that which I had the time to say. Unfortunately, early morning time constraints are as demanding and unyielding as an insistent itch. So, this evening, let's take a little while to scratch out a bit of an elaboration.
There are two parts to the confusion. The first is the claim or belief that removing the cap would in and of itself somehow make the payroll tax more progressive than it is already. But the payroll tax is a flat tax, and therefore not progressive at all. Any set percentage tax rate assessed on earnings, both large and small, is regressive by definition. This is simple text book economics. It is so because any percentage taxed from a small income is rightly seen to be far more burdensome than the same percentage levied against a much larger income. Worse, in this particular situation, there is a cap of $106,800 in earnings, beyond which there is no tax taken at all. Only those with small or modest incomes pay on every penny they make. Hence, the current Social Security payroll tax is not only regressive, it is super regressive.
This is all so obvious, one wonders how anyone could think of it any differently. Well, this muddled mindset arises from the fallacy of judging the method of generating the funding stream for Social Security in the context of the perceived performance of the program itself. And, indeed, as we shall see in a moment, this turns out to be not just a single, but a double fallacy.
The second part of the confusion in this matter rests in scoring the overall operation of the Social Security program as progressive. This conclusion mostly results from the fact that the program is both a form of insurance for spouses of prematurely deceased workers and for the disabled, as well as a rather straight forward retirement system. In the aggregate, these beneficiaries receive a greater direct pay-out than their contributions. This is so, but not by much, and it is virtually not so at all when normal retirees are looked at as a discreet group. And here kicks in the argument against raising the income cap on the taxable funding stream. It is made because the resulting much bigger contributors would not receive anything close to a direct proportionately equal benefit as the smaller contributors, and the program would be thereby made more steeply progressive, causing it ultimately to lose support and fall into disfavor. This is a plausible sounding argument, but it is profoundly wrong for the following reasons.
The strict proportionality of direct benefit tied to the requirements of individual participation in the revenue base tapped to satisfy the innumerable and varied needs and demands of the commonweal is not a necessary or usual test of the appropriateness or desirability of any particular governmental operation. Illustrations of this point are endless. Examples would include general taxes for the provision of a national flood insurance program, when only some are directly threatened by floods; for public education, when not everyone benefits directly and equally from its operation; for roads and highways, when some do not directly benefit as much as others who drive on them; for mass transit, when most do not benefit by its use personally; for airport construction and operation, together with the maintenance of an air traffic safety system, when some do not directly benefit by flying. It goes on and on, but that should be enough of that, I think. The point of it all is that in one way or another, directly or not, we all benefit from the sundry undertakings that enhance the quality of life for us as a people.
What is more, in the case of income security for the elderly, that is to say Social Security, the well-off benefit directly as much as, and perhaps even more, than those who receive a proportionately larger monthly check as a return for their contributions. Imagine how much less business and profit there would be for the well-to-do if the younger adult generation were saddled with having to support aging and unable to work parents, while trying to raise their own children and maintain a decent standard of living. Businesses ranging from the Hollywood movie industry to Walmart, restaurants to department stores, as well as toy manufacturers to clothiers, together with every other profitable undertaking in society would experience greatly reduced vitality and suffer significant reduction in revenue.
Prior to the creation of the Social Security program in the 1930s, more than half of the elderly were consigned to destitution and poverty, despite the assistance of family, churches and charities. This occurred not because the aged throughout their lives had irresponsibly refused to provide for their own retirement or hard luck, or that family, churches and charities were unwilling to extend all the relief available, but because in a meanly and demonstrably stratified society, especially one which consists of essentially only two classes - those few with and most without, this outcome is inevitable. A great many individuals will never have the means to lay up a sufficient supply of wealth to carry them through the end of life, past their productive years, without the collective effort of all of us fully.
Clearly, we all greatly benefit by a system which provides the elderly the wherewithal to live out their non-working years in dignity, and with as much independence as possible. Therefore, refusing to eliminate the income cap for assessing the payroll tax to fund Social Security fails to meet any standard: economic or moral.