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New W&M Social Security Bill Drops Payroll Tax Increase

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Posted on Nov. 1, 2021

Congressional Democrats will unveil a Social Security funding plan that would rely on taxing those making $400,000 or more a year while dropping a previous plan to boost payroll tax rates by 2.4 percentage points.

Even though the Social Security 2100 Act also calls for benefit increases, taxing wages above $400,000 would bring in enough revenues to extend the solvency of the Social Security Administration’s trust funds by four years to 2038, “giving Congress more time to ensure long term solvency” of the funds, according to a description of the legislation released October 25.

A similar bill introduced by House Ways and Means Social Security Subcommittee Chair John B. Larson, D-Conn., in the last Congress would have included the payroll tax hike and pushed Social Security’s insolvency date to 2041, according to an analysis by the Congressional Budget Office. Importantly, the tax hike would have closed the long-term gap in Social Security’s ability to make its payments from more than 20 percent a year to 5 percent.

Without the payroll tax hike, the new bill would close “more than half” of the long-term shortfall, according to a description of the bill.

The new version of the bill was expected to be released October 26 by Larson and Ways and Means Committee Chair Richard E. Neal, D-Mass.; House Majority Whip James E. Clyburn, D-S.C.; Sen. Richard Blumenthal, D-Conn., and some of the House cosponsors. Blumenthal introduced the Senate version of the bill in the last Congress.

For 2021 payroll taxes were collected on the first $142,800 of income. That threshold is adjusted for inflation each year, so a new $400,000-and-above grouping would create an income doughnut for payroll tax collections. Because the $400,000 figure wouldn’t be pegged to inflation, the size of that doughnut would decline over time until payroll taxes would be paid on all income.

Two years ago, Republicans bashed the proposal to boost payroll taxes by 0.1 percentage point each year from its current 12.4 percent to 14.8 percent after 24 years. Employees pay a 6.2 percent rate with employers paying an equal rate. The previous bill would have raised each share to 7.4 percent.

Republicans complained during a March 2019 hearing that a 2.4 percentage point increase would amount to nearly $1,000 for someone making $40,000 a year with half of that paid by the worker and half by the employer.

Like Larson’s previous bill, this one would raise benefits and shield more — although not as much — benefits from taxation.

DOCUMENT ATTRIBUTES
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Subject Areas / Tax Topics
Magazine Citation
Tax Notes Federal, Nov. 1, 2021, p. 706
173 Tax Notes Federal 706 (Nov. 1, 2021)
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Tax Analysts
Tax Analysts Document Number
DOC 2021-40597
Tax Analysts Electronic Citation
2021 TNF 44-27
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