Lifting the payroll tax cap backfires---hurts growth, which lowers tax revenue, and can’t solve due to tax evasion

Some have suggested addressing Social Security's financial troubles by removing the cap on taxable earnings and massively importing more funds into the program without making any structural changes. As I have argued in the past, this solution is inefficient, ineffective, and unfair. Given that the rich have already been tapped as new revenue sources for the Affordable Care Act and Medicare (and are being eyed for more), putting them on the hook for Social Security's deficit could spur further tax-avoidance behavior, which would reduce the revenues raised from the tax-cap increase considerably below actuarial calculations. And because the employer share of the payroll tax ultimately falls on workers, such a move would constitute a massive tax increase on the middle class. Most Americans earning more than $142,000 are not wealthy, especially if they live on the coasts, have large families, or have high educational or health expenses. Many will have trouble bearing the additional tax burden if the cap were removed. The volatility of personal income over time also renders such a large tax increase unfair. Many workers only experience high earnings temporarily, or at the close of their careers. According to the SSA, almost 20% of current and future covered workers are projected to earn above the taxable maximum during at least one year, and about a third of the future aged beneficiaries projected to earn over the taxable maximum in 2050 will be below the highest shared-earnings quintile. Taxing above the current maximum, therefore, does not mean one is capturing the earnings of only workers with very high lifetime incomes. Finally, as the SSA actuary observes, removing the taxable-earnings cap fills a declining part of the shortfall over time. If any benefits are credited for the increase in the level of earnings covered, the amount covered is even less. Eliminating the taxable-earnings cap would do little to address Social Security's shortcomings — it may even further undermine the program by weakening national productivity growth, savings, and labor-force participation. To succeed on this front, policymakers will need to pursue more meaningful, structural change.