Economic Aspects of the Social Security Tax
Research Publication No. 5
Foreword The social security tax, born in the Great Depression as a relatively small levy, has since burgeoned into a tax of major significance. For many families with low incomes, and for large families with moderate incomes, OASDHI tax payments will exceed their income taxes. For many employers, the tax has become an important business cost. In the mid-forties, collections from the social security tax accounted for less than 3 percent of total Federal tax collections; in fiscal 1967 collections for this tax will amount to nearly 17 percent of total collections, and be approximately 70 percent greater than receipts from Federal excise taxes.
Changes in the name of the tax mirror yet another facet of the system, the extension of benefits. From 1937 through 1955, it was known as the OASI (Old Age and Survivors Insurance) tax. Beginning in 1956, disability was added (OASDI); in 1966 health benefits (OASDHI) were introduced. Along with the transition from OASI to OASDHI, the level of benefits rose from a $60 monthly maximum for an individual in 1939 to the $168 provided by the amendments of 1965, but the end is not in sight.
All these developments underscore the need for re-examination of the effects of the tax which finances the social security system. When a tax represents but a tiny fraction of the economic framework, the effects may not matter, since presumably the impact will be weak. But when a tax has grown to be the largest source of Federal receipts after the income taxes, then the time has come to consider what differences this tax might make to individuals, to business, and to the economy.
An examination of any tax will turn up some blemishes, and this study of the social security tax is no exception. The fact that this study calls attention to a number of undesirable effects does not imply condemnation of the tax. Taxes should not be judged alone, but in relationship to the entire tax structure and to the uses made of the revenues. The major purpose here is to provide some of the material needed to make such comparisons.
Elizabeth Deran, Senior Research Analyst, had primary responsibility for the research and drafting of this study. Material assistance in preparation of this study came from economists associated with universities, business firms, and the government, from tax specialists, and from members of the Tax Foundation staff who provided thoughtful comments on earlier drafts.
The Tax Foundation is a private, nonprofit organization founded in 1937 to engage in non-partisan research and public education on the fiscal and management aspects of government. Its purpose is to aid in the development of more efficient and economical government. It serves as a national information agency for individuals and organizations concerned with government fiscal problems.