Impact on Social Security and Medicare Taxes

The Impact of Sensible Tax Reform upon Social Security and Medicare Taxes

Our Social Security and Medicare taxes are the most regressive federal taxes (that is, they fall much more heavily on the poor and other lower-income classes than upon high income groups). Even a high-school kid working at a fast-food restaurant is charged 7.65% in Social Security and Medicare taxes on everything that he earns. And those taxes can neither be rebated nor even deducted from income taxes. Employers must also pay the same 7.65%; while those costs are tax-deductible for businesses, they still add more than $435 billion to their costs every year. No person or business will pay those taxes under Sensible Tax Reform. The benefits will remain the same. However, the system will be funded from the general federal budget, instead of by workers.

The results will be dramatic for the poor and other lower-income groups. For a poverty-level family with $20,000 of income, their Security and Medicare taxes will fall (and therefore their take-home pay will rise) by $1530 (7.65% of $20,000). For someone with an income of $100,000, their increase in take-home pay will be $7650. Those with more than $102,000 of income (in 2008) pay the 1.45% Medicare tax on work-related income but no additional Social Security taxes. Thus, they will save more in dollar terms than the poorer groups, but the savings will be relatively less important to them as a share of their total income.