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Obama Would Lift Social Security Earnings Cap, But At A Lower Tax Rate

2 min readBy: Joseph Bishop-Henchman

Our most recent publication, Fiscal Fact 132: Hard Numbers on Obama's Redistribution Plan, estimates that the Obama taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. plan would distribute $131 billion per year from the top 1 percent of taxpayers to all other taxpayers. After this shift, the top 1 percent of taxpayers (1.13 million filers) would pay more in taxes than the bottom 80 percent (128 million filers).

These numbers do not include Senator Obama's proposal to remove the cap on earnings subject to Social Security taxes, currently $102,000 a year. He argues that removing the cap will bring in additional revenue that will prevent or at least postpone Social Security's move from surpluses to deficits expected to occur in the 2010's. Some disagree that tax increases will succeed in this purpose, and it would be a substantial tax hike with no increase in the benefits they receive.

Perhaps concerned about the fact that eliminating the cap completely would be equivalent to raising the top income tax rate by 12 percentage points, the Obama campaign modified its proposal, as covered by the Washington Post:

Under current law, income up to $102,000 a year is taxed for Social Security. Obama would create a "doughnut hole" by not imposing new Social Security taxes on income between $102,000 and $250,000. His aides said income exceeding $250,000 would be taxed at a rate of 2 percent to 4 percent, rather than the 6 percent tax that people pay toward Social Security on income below the $102,000 cutoff, which is matched by their employer's paying a 6 percent tax. Employers would probably pay an additional tax, but the total tax paid by both employee and employer would not exceed 4 percent of the amount of income earned over $250,000.

Experts predict that proposal would make up less than half of the $4.3 trillion shortfall Social Security is expected to face over the next 75 years.

In short, the Social Security tax under Senator Obama's plan would be 12.4% for income from zero to $102,000; 0% for income from $102,000 to $250,000; and 4% from $250,000 and up.

More on Social Security and payroll taxes here.