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Biden's Plan to Increase Taxes for Social Security Spares the Very Rich

Biden's Plan to Increase Taxes for Social Security Spares the Very Rich

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Biden's Plan to Increase Taxes for Social Security Spares the Very Rich

Social Security's trust fund is in a lot of financial trouble, and Democratic presidential nominee Joe Biden has a plan to fix it. Mr. Biden has indicated that if elected, he'll expand the income that payroll taxes apply to.

Currently, these taxes are collected only up to an annual wage base limit, which is $137,700 for 2020. While the majority of Americans pay them on their entire salaries, those who earn income above this level don't. Mr. Biden would change that by imposing payroll taxes on income above $400,000.

This would create a donut hole where Americans with incomes between $137,700 and $400,000 don't pay anything extra, but those with incomes above that threshold would be asked to pay more to help fund benefits for others without a corresponding increase of their own retirement income.

This is a fundamental change to how Social Security works, as the current system entitles retirees to benefits based on the amount they pay in. It's a change that would affect many wealthy Americans -- but that could spare some of the richest people in the country. Here's why.

Image source: Getty Images.

The top 1% get their income from different sources

While Mr. Biden is asking high earners to pay more to fund Social Security, his decision to do so by expanding the payroll tax means the extra revenue will come only from those who earn their money from a traditional job. That's because payroll taxes are collected on income from employers as well as self-employment income.

Funding Social Security through payroll taxes makes a lot of sense when there's a direct link between the amount you pay in and the benefits you receive, as the program is intended to replace a portion of your wages when you retire. But when you break that link and are simply aiming to collect more revenue from the wealthy to help fund an important social program, there's little reason to maintain the connection.

By collecting additional tax revenue for Social Security as a payroll tax, Mr. Biden is essentially creating a new higher marginal tax rate, but one that applies only to income earned from a certain kind of work. And many of the richest Americans don't receive their money that way. Instead, for those in the top 1%, the bulk of income comes from either business income or investment income -- neither of which would be subject to the new payroll tax he's proposing. In fact, data from the Urban-Brookings Tax Policy Center reveals that the top 1% of Americans get more than half of their income from investments or business income, rather than as compensation for work.

Many of the wealthiest Americans also have the flexibility to structure their income so even more of it comes from these other sources if they want to escape the new tax the former VP is proposing. In fact, Mr. Biden himself embraced one common approach the wealthiest Americans are likely to use to avoid the added payroll tax . As their 2017 and 2018 tax returns reveal, the Bidens created an S-corporation and received around $13.3 million of their income through it. While they paid themselves around a $750,000 salary from their company (so they'd pay some additional payroll taxes), they treated another $13.3 million as corporate profits not subject to payroll tax so the bulk of their income would be spared.

While Mr. Biden has other plans to impose higher taxes on the wealthiest 1% to fund other programs, his solution to Social Security's funding crisis means many of America's billionaires would continue to pay into Social Security on only a minuscule portion of their total incomes, even as lower- and middle-income Americans are taxed on the entirety of their earnings in support of the program.

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