Taxes to fund Social Security end once a worker makes more than $102,000 this year, a ceiling that is indexed to inflation. Workers and employees share the cost, with each contributing 6.2 percent. Under Obama's plan, which the presumptive Democratic nominee will discuss this afternoon at a retirement community here, there would be a "doughnut" between $102,000 and $250,000 when no taxes are paid, according to a campaign adviser who asked not to be identified. But then new taxes would be imposed on people making more than $250,000.
I like the idea of funding Social Security. I also like the idea of taxing the highest incomes for Social Security at the same rate as everybody else. So the doughnut hole sounds like a great idea at first blush. Does it make sense, though?
Under the current system, a person making $16,129 pays $1000 in Social Security taxes. A person making $32,258 per year pays $2000. A person making $96,774 pays $6,000. That's 6.2% of their incomes. A person making $967,740 pays only $6,324. A person making $9,677,400 still pays only $6,324. That's .65% and .065% of their incomes, respectively. If it is progressive under $100,000, shouldn't it be progressive over $100,000, too?
However, I'm not quite sure how you justify this exemption between $102,000 and $250,000 (other than, of course, the political reality that there are a lot of Democratic voters along the coasts with incomes in that range). What else makes these people so special? Don't the lowest income voters need a break more? Remember, even if you pay no other income taxes, you pay the 6.2% Social Security taxes.
The best justification I can come up with is that you want everyone paying into Social Security, but you don't want to excessively burden some taxpayers. Having everyone pay keeps a sense of fairness in the program so that it is more comparable to a pension than a welfare program. That requires taking 6.2% from even the lowest wage-earners up to $102,000. Taxing the highest incomes at the same 6.2% rate would also contribute to a sense of fairness, so that the wealthy are contributing a proportionate share of their incomes. That requires the over $250,000 portion. Continuing to tax at the rate of 6.2% in the $102,000 to $250,000 income levels, you would drastically increase taxes by thousands of dollars on a lot of families that are well-off but would be more burdened by a tax increase than the over $250,000 group.
The doughnut hole meets two important, but sometimes competing, goals - progressivity and inclusiveness.
What about the employers' 6.2% contribution? Does the new doughnut hole apply to them? I hope the cap stays at $102,000 for employer contributions.
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