TaxProf Blog

Editor: Paul L. Caron
Pepperdine University School of Law

A Member of the Law Professor Blogs Network

Saturday, May 31, 2008

Biggest Losers Under Obama's Plan to Remove the Current $102k Wage Ceiling for Social Security Taxes

Tax Foundation:  Obama’s Plan to Abolish the Social Security Wage Ceiling: A State-by-State Breakdown, by Gerald Prante:

It is commonly observed that the policy ideas of Barack Obama and Hillary Clinton are almost identical, but Obama does have one major tax proposal that Clinton does not specifically endorse: eliminating the wage ceiling for Social Security taxes. ...

[T]here has always been a ceiling on the tax, an amount of annual wages above which the tax does not apply. Right now, the wage ceiling is quite high, $102,000 for a single person ... In 2008, the maximum Social Security tax for a single person is 12.4% of the first $102,000 in wages, or $12,648.

Reporters have asked Obama how he can propose to abolish the wage ceiling and also keep his promise not to raise taxes on anyone who makes less than $200,000 or $250,000 (Obama has cited both figures). His response is that he might campaign for a "donut hole" in the Social Security tax. That is, wages up to the ceiling would be taxed as usual, followed by a non-taxable amount up to $200,000 or $250,000, and then all wages above that would be taxed.

In the table below we give a state-by-state breakdown of those three scenarios: (1) wage ceiling is eliminated, (2) wage ceiling eliminated but with a donut hole up to $200,000, and (3) wage ceiling eliminated but with a donut hole up to $250,000.

Here are the ten states that would be hardest hit by Obama's proposal (along with the percentage of the state's workers who would see their taxes increase under the Obama plan):

  1. New Jersey (10.7%)
  2. Maryland (9.6%)
  3. Connecticut (9.5%)
  4. Virginia (9.0%)
  5. Massachusetts (8.9%)
  6. California (8.8%)
  7. New York (8.0%)
  8. Illinois (7.02%)
  9. Colorado (6.96%)
  10. New Hampshire (6.8%)

Here are the ten states that would be least affected by Obama's proposal (along with the percentage of the state's workers who would see their taxes increase under the Obama plan):

  1. Montana (2.4%)
  2. North Dakota (2.6%)
  3. South Dakota (2.9%)
  4. West Virginia (3.38%)
  5. Nebraska (3.41%)
  6. Idaho (3.44%)
  7. Wyoming (3.45%)
  8. Iowa (3.5%)
  9. Kentucky (3.6%)
  10. Mississippi (3.7%)

http://taxprof.typepad.com/taxprof_blog/2008/05/biggest-losers.html

Think Tank Reports | Permalink

TrackBack URL for this entry:

http://www.typepad.com/services/trackback/6a00d8341c4eab53ef00e552abee5e8834

Listed below are links to weblogs that reference Biggest Losers Under Obama's Plan to Remove the Current $102k Wage Ceiling for Social Security Taxes:

» Some Obama links from Maggie's Farm
Obama say's he'll remove the wage ceiling for Social Security taxes (without increasing benefits). What states' workers get hit hardest? I read the WaPo Sunday editorial about winning the war in Iraq, but I just noticed the last line: Now he (Oba... [Read More]

Tracked on Jun 3, 2008 2:49:27 PM

» Questions — Special “Obama Donut Hole” Edition from A Stitch in Haste
Barack Obama has, as was widely expected, introduced a proposal to lift the cap on wages subject to Social Security tax, but with an exemption -- often r... [Read More]

Tracked on Jun 16, 2008 6:11:05 PM

Comments

This an increase on the employer as well because he pays half or 6.2% of the total of 12.4%.

Posted by: the count | May 31, 2008 12:58:17 PM

The linked article gives 3 scenarios and you show the percentages for scenario one, which is by far the highest percentage affected (for NJ the other 2 scenarios would affect 2.5% and 1.5% respectively rather than 10.7%) and which isn't actually Obama's proposed plan (since he's proposing the "donut hole" approach) - that might not affect the ranking much but certainly overstates the proportion of the population impacted.

Posted by: PaulM | May 31, 2008 1:33:39 PM

We are all losers under an Obama presidency.

Posted by: Diggs | May 31, 2008 1:51:12 PM

So why increase Social Security and Medicare taxes NOW? These are still running a surplus and that surplus gets spent as part of the general Treasury funds.

The proposal will push back the date when the "trust fund" goes negative cash flow as disbursements exceed receipts.

Why don't we just wait until cash flow goes negative and then increase the ceiling or cut benefits? The answer, of course, is that the federal government wants more of your cash to spend as soon as possible.

What Obama is proposing is a regressive tax increase today up to the new lower edge of the "donut" On the far side of the "donut," I don't the "progresstivity" of the income tax is increased but that part of the proposal is a bit fuzzy.

Posted by: Joseph Somsel | May 31, 2008 2:25:21 PM

Even though the percentage of affected taxpayers and employers might be low, doesn't the fact that they are the *top* money generators mean that the amount of capital involved is huge? I'm not very knowledgable about economics, but it seems to me as if such a plan could impoverish already-strapped state governments. If this concern is relevant to the discussion, could somebody who knows more than I do please comment?

Posted by: ChknLtL | May 31, 2008 3:42:23 PM

Why does no one ever address the actual formulaic results of the extending payroll taxes vis-a-vis social security? Currently, the payouts upon your retirement are based on the 'points' you accrued during your working career (I'm not going to go into detail....anyone can go to ssa.gov and read at their leisure) which is founded on the current social security/payroll tax structure. One of the reasons that we don't tax Bill Gates on his entire gargantuan income is because we don't want to be paying him six figures per month when he retires.

Don't get me wrong, it's not a dollar for dollar match, but the formula for what you pay is most certainly designates what you "get in return" and if you pay in tens or hundreds of thousands (or millions) per year, the formula will dictate that you will get monstrous social security checks when you retire.

Unless, that is......
...if the liberal dream of taking Bill Gates' money (and every other achiever) and spending it on their own pet issues (like, say, paying for THEIR trips to the doctor, paying for THEIR prescription medicine, paying for THEIR crappy schools, paying for THEIR retirement, paying for THEIR social programs, etc.) and then telling Bill Gates that he has enough & can get by on the current max of < $2 grand per month in bennies.

Or, in short, from those according to their means, to those according to their needs.

Let's not kid ourselves on the actual goal....Obama wants to increase payroll taxes on those "according to their means" and spend it on those "according to their needs". They'll tell you what the needs are (right after they tell you that everyone qualifies).

Posted by: RW | May 31, 2008 6:39:00 PM

The above lists settle it for me. I'm willing to wager a sawbuck that, if Obama is elected, come 2010, most of the Democrats in the first list who voted for The Messiah will stare in disbelief at their tax bills, clap their hands to their foreheads, and moan, "What the f*** was I thinking on Election Day?"

Posted by: MarkJ | May 31, 2008 7:19:58 PM

Under the current system, social security payouts are also capped. If the taxes are uncapped, with the payouts be uncapped as well? If so, uncapping makes things worse. If the payouts remain capped, social security becomes a significant tax for high-income folk, which is something that social security advocates have tried hard to avoid for years. Why? The high-income folk are very politically effective. If they're going to be paying for SS, they're going to go after "their share" of its benefits.

Posted by: Andy Freeman | May 31, 2008 9:43:49 PM

The anti-business, anti-success policies of the democrat party force businesses to move to China. That is why China donates to them.

The obvious solution to this silly social security tax increase is to become a Subchapter S corporation, like John Edwards. Take your income as dividends. No social security tax, no medicare tax, longterm capital gain tax rate (1/2 the income rate)

The rich democrats are not stupid. They just realize that the poor working class are stupid.

Too bad American workers can't figure this out, as well as $4 gasoline, lousy teachers union schools, high crime, crumbling roads and infrastructure...

Posted by: JoeS | May 31, 2008 9:53:23 PM

Even if the cap on benefits was adjusted under such a proposal, lower income folks would still bear the brunt of it. I own a business with the most generous retirement plan allowed. My employees understand that FICA is part of their retirement package. If FICA goes up, then the optional portion or their match will be reduced and even eliminated to compensate the business for the increased expense. As our retirement system is now based on defined contribution, business owners have the ability to define the contribution downward in response to these tax increases, taking it out of other compensation. I daresay the state of the economy after removing the tax cap would be such that workers would feel fortunate to have a job at all.

Posted by: tom | Jun 1, 2008 3:49:12 AM

A table of results for the 3 scenarios is mentioned ("In the table below"...). Where is the table?

Posted by: Mark T | Jun 3, 2008 9:35:01 AM

I like the idea that the wealthy will be taxes for social security on income above $250,000 (the donut hole plan) and that every dollar above the $250,000 is to be taxed for SS. After all that could bring in more dollars to help fix the SS system and create a more level playing field. Right now, most Americans make less than $100,000 (let alone $250,000) and every single dollar is taxes for SS. Most Americans don't get to choose how this money is managed or distributed. But the richer only get taxed up to $102,000. Then it "hooray" time. They get to build their 401k's and other retirement portfolio's in ways that Americans making under $102,000 never dream of. But by having a plan that taxes SS on income up to $102,000 and from $250,000 and up, Americans reaching $102,000 are hopeful that for some time (between the time they make $102,000 and $250,000) they will be able to make great changes in their lives, payoff debts, create wealth, etc... so that when they reach the $250,000 (and they will want to reach it) they will be ready to give more to the SS system and handle it well.

Furthermore, that might help fix the current SS shortfalls over time. But this plan really needs the donut hole in the plan as I see it. Otherwise, employers with ee's earning income up to $250,000 and more will be required to pay the matching portion of SS. In the hard economic times we are in, this would add up to a lot of money many business' simply do not have and result in layoffs or serious cut backs on expansion plans. That hurts everyone.

By having the Donut Hole in the plan, many American are encouraged to work hard and be innovative to try and secure for themselves higher salaries of up to $250,000 and get ahead, truly changing their lives. This "Donut Hole" gives up and coming Americans a buffer before they have start "giving back" with higher SS contributiions.

Posted by: M. Hidalgo | Oct 7, 2008 11:37:34 PM

Don't beleive it. The donut hole is a myth. It will never happen.Only the part about taxing the "wealthy" is in play. He thinks anyone that isn't on welfare is "the wealthy".
It is part of the socialist means to redistribute your money the way he wants to. You won't give it to unmotivated sob's but he will.
It's not about social security. That's the side show to distract attention while he increases governmental socialism on a scale even franklin roosevelt couldn't dream of.

Posted by: D.Odland | Nov 11, 2008 10:32:29 PM