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Social Security: Raising or Eliminating the Taxable Earnings Base, Date: January 17, 2002 1 (January 17, 2002)

handle is hein.tera/crstax0371 and id is 1 raw text is: Order Code 97-116 EPW Updated January 17, 2002 Social Security: Raising or Eliminating the Taxable Earnings Base David Koitz and Geoffrey Kollmann Specialists in Social Legislation Domestic Social Policy Division Summary Social Security taxes are levied on earnings up to a maximum level set each year. In 2002, this maximum - or what is referred to as the taxable earnings base - is $84,900. There is no similar base for the Medicare Hospital Insurance (HI) portion of the tax; all earnings are taxable for HI purposes. Elimination of the HI base was proposed by President Clinton and enacted in 1993, effectively beginning in 1994. Recently others have proposed that the base for Social Security be raised or eliminated as well. They complain that taxing earnings only up to a certain level creates a regressive tax. They point out that the 94% of all workers whose earnings fall below this level have a greater proportion of earnings taxed than the 6% whose earnings exceed it. They contend that the revenues generated by raising the level- estimated at about $90 billion in 2002 if all earnings were taxed - could be used to reduce Social Security taxes for lower wage earners or help reduce the long-range actuarial shortfall in Social Security. Those who support retaining the base in its current form point out that Social Security's benefit formula favors low-wage earners by replacing a greater proportion of their earnings than it does for higher wage earners. They argue that the progressive benefits mitigate the regressive tax. They maintain that eliminating the base completely would cause enormous benefits to be paid to millionaires (since benefits are based on one's earnings record), weaken pensions and other forms of private savings, and ultimately erode public support for the program. Background Social Security was enacted in 1935, and the Social Security tax was first levied in 1937. From 1937 through 1949 the tax rate was 1% (on employee and employer, each) on earnings up to $3,000 a year. From then on, the rate and taxable maximum were increased numerous times to help meet the financing needs of the program and to keep the taxable maximum up to date with changing earnings levels. Medicare was enacted in 1965, and the HI portion of the program also was financed with payroll taxes. The HI tax was first levied in 1966 at a rate of 0.35% (on employee and employer, each) and the Congressional Research Service °0° The Library of Congress CRS Report for Congress Received through the CRS Web

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