Tax hike alone won't save Social Security, think tank warns

A proposal to tax high-earning Americans more as a way to address the fiscal challenges with Social Security and Medicare funding overlooks its broader impact on households and the economy.

That’s according to the Tax Foundation, which warned about the potential far-reaching consequences of the Medicare and Social Security Fair Share Act proposed by Rhode Island Sen. Sheldon Whitehouse and Rep. Brendan Boyle from Pennsylvania.

“Lawmakers have two options to make Social Security and Medicare sustainable: raise revenue or reduce spending,” the Washington-based think tank explained in a new analysis. “[The proposal] tries to solve the problem only by raising taxes on people earning over $400,000.”

According to its analysis, the suggested tax hikes could raise more than $3 trillion over the next decade, but may also lead to adverse economic outcomes, including a decrease in long-run GDP by 1.2 percent and a potential loss of 759,000 full-time equivalent jobs.

While the bill prioritizes revenue collection from taxpayers earning more than $400,000 annually, the research foundation suggests it would have a long-run impact across the income spectrum, with households seeing their after-tax income go down by 2.1 percent on average.

“While the political rhetoric may focus on the tax hikes directly applied to the top 1 percent, most taxpayers would earn lower incomes in the long run,” the Tax Foundation said.

It noted that the proposals would mark a significant shift in the tax landscape by imposing one of the highest income tax rates on high earners within the Organisation for Economic Co-operation and Development.

“For example, the [net investment income tax] hike under the plan introduced by Sen. Whitehouse would put the combined top marginal capital gains rate at 42.3 percent, the highest in the OECD,” the think tank said.

With the Social Security payroll tax on income over $400,000, the U.S. would see its combined marginal income tax rate – counting state and local income taxes as well as employee-side payroll taxes – balloon to roughly 53.4 percent.

Proponents of the tax increases argue that they are a necessary step toward ensuring the solvency of Social Security and Medicare. Underscoring the scale of the problem, the Tax Foundation estimates the combined shortfall for both programs, counting interest expenses incurred over time, could be as much as $116 trillion over the next 30 years.

But focusing on taxation alone won’t be enough, it said, arguing that a sustainable solution would take both revenue and spending reforms.

“We will not make progress implementing good ideas if we are distracted by the temptation to tax that rich person behind that tree,” the Tax Foundation said.