As an expert in tax evasion history, I’ve seen countless attempts to balance budgets and fund social programs. The latest proposal, the Medicare and Social Security Fair Share Act, is no exception. This act aims to make Social Security and Medicare sustainable by raising taxes on individuals earning over $400,000. However, the long-term economic implications of this proposal could be more detrimental than its proponents realize.
The Act proposes sweeping changes to payroll taxes, which fund Social Security and much of Medicare. The 12.4% Social Security payroll tax would be imposed on both wages and self-employment income over $400,000, a significant increase from the current law that applies only to the first $168,600 in earnings. Additionally, the bill would increase the additional Medicare tax from 0.9% to 2.1% on wage and self-employment earnings over $400,000 (single) or $500,000 (joint).
Furthermore, the proposal would raise the net investment income tax (NIIT) from 3.8% to 17.4% for single filers earning over $400,000 or joint filers earning income over $500,000. The current law NIIT applies only to a taxpayer’s passive investment income for people earning over $200,000 as a single filer or $250,000 as a joint filer. The bill would also expand the NIIT tax base to include active business income.
These changes are estimated to raise more than $3 trillion over 10 years. However, the tax increases would penalize work, saving, and investment, negatively impacting the economy and reducing revenue collections compared to the conventional estimate. On a dynamic basis (accounting for economic effects), the bill would raise about $2.4 trillion, or about 78% of the conventional estimate.
Moreover, the bill would reduce long-run GDP by 1.2%, which under 2024’s economy would amount to $340 billion in lost output annually. Wages would fall by 0.5% and employment by 759,000 full-time equivalent jobs. American incomes (GNP) would fall by 1.3% in the long run.
While the political rhetoric may focus on the tax hikes directly applied to the top 1%, most taxpayers would earn lower incomes in the long run because of the Medicare and Social Security Fair Share Act. On average, households would see a 2.1% reduction in after-tax income. This ranges from a 1% decrease for people in the bottom 60% up to an 8.3% decrease in after-tax income for the top 1% of earners.
International experiences and budget math both show that we will need a combination of revenue and spending reforms to get entitlements on a sustainable path. Solely raising taxes to rectify entitlements would also put the U.S. in an uncompetitive international position. We will not make progress implementing good ideas if we continue to believe that we can solve a problem of this scale by only taxing the very richest American households.
As always, it’s crucial to remember that every financial decision has consequences. It’s our responsibility to understand these consequences and make informed decisions that will contribute to the well-being of our communities.