Table 2 lists the estimated revenue impact of each change in 2024.įirst, the 12.4 percent tax that funds Social Security would apply to most employment earnings of the rich – not on all earnings above the current cap but on earnings exceeding $400,000. The Medicare and Social Security Fair Share Act introduced by Senator Sheldon Whitehouse would increase these taxes in several ways to ensure that well-off people pay a tax of 17.4 percent on their income to fund Medicare and Social Security, whether that income is earned or generated from investments. How the Medicare and Social Security Fair Share Act Would Change These Taxes were subject to Social Security taxes in 1983, but now the share has fallen to 83 percent. According to the Congressional Budget Office, 90 percent of earnings in the U.S. that are subject to Social Security taxes has fallen. For one thing, as the share of earnings flowing to the highly compensated grows, the share of total earnings in the U.S. There are strong reasons to make the financing of these programs more progressive. Under the formula used to calculate benefits, there is a maximum limit on benefits that can be paid to high earners just as there is a maximum limit on Social Security taxes paid by high earners. However, the Social Security program as a whole is progressive because the benefits replace a larger share of earnings for low-income people than for high-income people. Taken on their own, the taxes that finance Social Security are regressive because they only apply to earnings (not investment income) and because these earnings are capped at a level far below what the best-compensated Americans make every year. While NIIT revenue technically is not directed to Medicare under current law, the general idea is that well-off people will pay a tax with a top rate of 3.8 percent on their income to help pay for Medicare, whether that income is earned income or investment income. While middle-income Americans do not pay any Medicare tax on investment income, high-income people pay a Net Investment Income Tax (NIIT) of 3.8 percent on investment income that pushes their Adjusted Gross Income (AGI) beyond $250,000 for married couples and beyond $200,000 for others. (The additional Medicare tax of 0.9 percent on earnings is all paid directly by the employee with no employer-employee split.) Again, analysts believe the employer share of the tax is ultimately paid by the employee in the form of reduced compensation. The regular Medicare tax of 2.9 percent is technically split in half when paid on employment earnings, so that 1.45 percent is paid by the employee and the other 1.45 percent is paid by the employer. Medicare is financed mostly by a 2.9 percent tax on earnings, although an “additional Medicare” tax of 0.9 percent effectively provides a second bracket, with a rate of 3.8 percent, for married couples making more than $250,000 and others making more than $200,000. For self-employment earnings, the entire 12.4 percent tax applies. But analysts generally believe the employer share of the tax is passed on to the employee in the form of reduced compensation, so ultimately employees are paying the entire tax. The tax is technically split in half, with 6.2 percent paid by the employee and 6.2 percent paid by the employer. Social Security is currently financed by a 12.4 percent tax on earnings, up to the cap (which is projected to be $170,400 next year). How Taxes Pay for Social Security and Medicare
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