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For all tax payers Medicare is a constant no matter how much money you make but Social Security stops as some point. For most people it never stops since the limit is currently $94,200 but if you make more than that you don't pay any social security tax on the extra money. I've often said that when you include the effect of social security, rich people can actually pay a smaller percentage of their income to taxes than people who make less money. Jim's chart proves this. Here's an example, first the straight income tax bracket:
- 28% for income between $74,200 and $154,800; plus $15,107.50
Next what Jim calls the take home pay bracket:
- 35.65% for income between $74,200 and $94,200; plus $20,783.81
But notice that the take home pay bracket ends at $94,200. That's because once that figure is reached social security taxes stop. So for someone making more than $94,200 their percentage of total income tax actually decreases. Here's another figure from Jim's chart:
- 29.45% for income between $94,200 and $154,800; plus $27,913.81
This means that a person making up to $154,800 is only paying 29.45% in taxes where the person making $94,200 is paying 35.65%.
Ok so what does this mean? Well it's not exactly simple. You can't just say the rich are getting a break at the expense of those less fortunate. Since there is a cap on the amount of benefits you receive from Social Security, it's not like those who stop contributing are getting a higher percentage return. But it does expose a flaw nonetheless. Medicare has no such income limit on contributions and the percentage we all pay is much less.
Social security tax is 6.2% but Medicare is only 1.45% (employee contribution). Imagine if we eliminated the income limit on Social Security contributions but, at the same time, reduced the amount to say 3.1%, wouldn't that be more fair? It would probably also fix the solvency problem. Right now someone making the max of $94,200 pays $5840 but at the lower rate they would only pay $2920. Someone making $200,000 under the current system only pays 2.92% or $5840. Under my plan their tax burden only increases by $360. Someone making $500,000 goes from paying $5840 to paying $15,500. That's a large increase but do you feel sorry for them? Do you think they would want to change places with you? Of course not. I'm sure that person won't be happy but they can afford it.
It's just a thought but one worth considering if you ask me.
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