Donald Trump questions why the federal government should tax Social Security benefits.
Strictly speaking, this is not a tax on benefits. We already Tax on additional income It is the income that a Social Security recipient earns while receiving their Social Security check. If Social Security is their only source of income, an individual does not have to pay taxes on it.
As a result of this tax and other penalties, older people who continue to work often end up paying the highest tax rates in the country, much higher than younger people making the same income. This is unfair and punishes people who work while collecting Social Security benefits.
On the other hand, as others have pointed out, completely repealing the tax would result in a huge revenue loss for the Treasury. The deficit is already exorbitant.
But there are low-cost ways to reform some of the tax system’s worst features.
Under current law, if half of your Social Security benefits and other income combined exceed $25,000, an individual can Income tax For every additional dollar you earn, 50 cents of your Social Security benefit is forgiven, and you also have to pay ordinary income tax on that dollar, so essentially you have to pay $1.50 in taxes on every dollar you earn.
That means that each extra dollar of income will be taxed at a rate 50 percent higher than a younger person earning the exact same amount.
It gets worse.
Once you reach the $34,000 combined income threshold, the tax on your Social Security benefits rises to 85 percent for every additional dollar of income. That means you pay $1.85 in taxes on every dollar you make — 85 percent more than a young person making the exact same amount.
For Someone 15% of ordinary income:
- The Social Security benefit tax could raise the tax rate on retirement income, 401(k) and IRA withdrawals from 15% to 27.75%.
- Taxes on capital gains and dividend income could rise from zero to 12.75%.
- Even non-taxable income may be subject to a 12.75% tax rate.
That’s right: Seniors will have to pay tax on bonds that are supposed to be tax-free.
For most of the system’s history, Social Security benefits were not subject to tax. 1983Congress passed legislation to “save” Social Security, but its main components were two major cuts to benefits: raising the full retirement age and taxing benefits. The original Social Security benefit tax was originally designed to only affect very high-income seniors.
But here’s the catch: Benefit taxes were intentionally not indexed to inflation, so while initially less than 10% of retirees paid tax, today More than halfUnlike other parts of the tax code, inflation imposes additional taxes on most Social Security recipients.
To make matters worse, working seniors who have not yet reached full retirement age can face astronomical marginal tax rates when the benefit tax is combined with another unjust “tax,” the Social Security income penalty.
This year, early retirees will lose 50 cents of their Social Security benefits for every dollar of income above $22,320, which is a 50 percent tax rate.
When income and payroll taxes are added, older workers face marginal tax rates of over 80 percent, meaning they get to keep 20 cents of every dollar they earn.
Note that these high marginal tax rates only apply to middle-income seniors; low-income seniors do not earn enough. For high-income seniors, there are no marginal tax rates once their benefits are fully liquidated by the earnings penalty or “fully taxed” by the benefit tax.
Given the current fiscal situation, it would likely be too costly to solve all of these problems in the foreseeable future, but eliminating the earnings penalty could raise government revenues by encouraging older people to work longer and forcing them and their employers to pay additional income and payroll taxes.
It would also eliminate sky-high marginal tax rates by including a portion of benefits in ordinary (taxable) income, rather than the current Rube Goldberg approach: Seniors would no longer effectively pay tax rates 50 percent or 85 percent higher than other workers.
This would also eliminate a hidden inflation tax on seniors, since tax rates on ordinary income are already indexed to inflation (unlike current Social Security benefit taxes).
Older people who want to continue working, investing, and contributing to the economy should not be penalized so severely for doing so, and they should never benefit from government-induced inflation at the expense of the elderly and disabled.
John C. Goodman is president of the Goodman Institute for Public Policy Research. Stephen Moore He is the chief economist at FreedomWorks and co-founder of the Commission to Unleash Prosperity.
