Payroll Tax Cut/Base Broadening Proposal by Mark Goldwein

Mark Goldwein wrote an interesting proposal in to reduce payroll taxes paid by employees while raising revenue to address social security shortfalls.  

For context, Mark writes:

“…. Currently, the federal government taxes 12.4 percent of wages to cover the cost of Social Security benefits. This payroll tax is divided evenly between a worker and her employer so that each pays 6.2 percent. It applies only to cash wages and only up to a maximum of about $133,000 of earnings per year, otherwise known as the taxable maximum.”

As noted above, the payroll tax only applies to cash compensation below a specified amount. According to Mark, about 15% of cash compensation is paid to those individuals earning more than the taxable maximum and about 20% of total compensation is paid to employees as non-cash compensation, neither of which is subject to the tax.

Mark argues that requiring all non-cash compensation to be subject to the tax (at a  rate of 5.2%) raises additional revenue sufficient to reduce the payroll tax to the employer and employee from 6.2% to 5.2%.

Without discussing the merits of the proposal, the fact that the current payroll tax of 12.4% is insufficient to pay for current benefits is absolutely astounding and probably something that most voters simply do not understand or appreciate. This is not sustainable and kudos to Mark for proposing a thoughtful solution. Yet, again it seems crazy that a 12.4% payroll tax on approximately two-thirds of all compensation is insufficient. Why and how did this happen?