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There's A Simple Alternative To Trump's Proposed Entitlement Cuts, But No One Likes To Talk About It

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There's A Simple Alternative To Trump's Proposed Entitlement Cuts, But No One Likes To Talk About It

America’s debt is the largest for any single country in the entire world. Indeed, one of the more unsettling sights on the internet is the U.S. national debt clock, a running record of the increasing debt load in total, as well as how it breaks down per citizen.

One of, if not the single most frequently cited cause of America’s budget problems lies in so-called “entitlements” — federal government programs like Medicaid, Medicare and Social Security. These items, taken together, account for more than half of discretionary federal spending. Many agree that this is a problem, but that’s often where the agreement stops.

The entitlement debate is often dominated by fiscal hard-liners (who often propose hefty cuts to these programs accompanied by reduced taxes) and progressive tax policy proponents (who often seek to protect or increase current benefits and pay for it through tax increases).

One line of thought that seems to gain little to no traction is substantially raising the so-called “tax max” — a limit to the amount of income subject to the payroll taxes that pay for Social Security and Medicare. In 2017, this cap was raised from $118,500 to $127,200, meaning Americans pay a payroll tax rate of 7.65 percent now (for Social Security and Medicare combined) on their first $127,200 of income. Every dollar earned beyond that isn’t subject to these taxes.

What That Means

For the majority of Americans, this means shelling out payroll taxes on 100 percent of their income. But for someone making, say $200,000 per year, they pay these taxes on only about 64 percent of their income, and the effective rate drops from 7.65 to just 4.9 percent. And the bigger an individual's earnings, the more striking this regressive difference becomes, prompting some to call foul.

U.S. Senator and one-time presidential candidate, Bernie Sanders, has expressed support for raising the tax max. His website says, “Not only is this the right thing to do from a moral perspective, it is also what the vast majority of the American people want us to do.” Sanders’ site says 61 percent of Americans support lifting the cap, citing an NBC News/Wall Street Journal poll.

A Brief History

Since entitlements were created, the tax max has been increased on an ad-hoc basis. While nearly all these raises have been made in order to compensate for things like inflation and wage level increases, there are some who advocate for a large-scale increase to the tax max — or scrapping it all together — to improve system financing and maintain meaningful benefits for all, including middle and higher earners.

As income inequality has become more and more pronounced, those who bring home annual pay greater than the tax max have seen their earnings grow at rates significantly greater than other workers. However, In wage-adjusted dollars, the tax max has remained roughly constant since the mid-1980s.

Is It Really That Simple?

While Sanders argues that raising the income cap on payroll taxes would extend Social Security’s solvency for the next 50 years, and reduce income inequality in the process, others paint a more complex picture.

Bankrate.com quoted Karen Smith, senior fellow at policy think tank the Urban Institute, as saying the only “real answer” is to raise the payroll tax on everybody. According to Smith, an increase in the payroll tax rate paid by workers to 7.7 percent would extend funding reserves through 2087.

Also, as benefit payments are currently structured, it’s questionable whether well-to-do seniors would truly benefit. According to a Reuters report, CEPR director of domestic policy Nicole Woo said, “If you just paid back the wealthiest wage earners at that top rate, they'd see some really big checks that they really don't need, and it wouldn't address the long-range shortfall.”

Still, those “big checks” would help mitigate the increased taxes paid by higher earners, and with money accumulating into Social Security trust funds faster, time value of money dictates this would mean a significant increase in interest earned over time.

A Budget Cut By Any Other Name...

President Donald Trump, in a budget proposal released in the spring, seeks to balance the budget, in part, by trimming more than $70 billion in Social Security spending (specifically, from Disability Insurance, which covers about 10 million Americans).

Trump's budget director Mick Mulvaney has attempted to sell the cuts as, well, as being something other than cuts, saying in effect that Trump’s campaign promises to keep Social Security intact were meant only to apply to retirement benefits. This argument has failed to sway the budget’s critics, however.

Mulvaney, known for his ultra-hawkish fiscal conservatism, has long espoused the opinion that social safety net programs belong on the chopping block if the country is to get serious about trimming the fat from its budget. Some see Trump’s budget proposal as bearing more of Mulvaney’s fingerprints than his, while others note that it’s unlikely to matter as Congress rarely sticks very closely to any president’s initial budget proposals.

Still, what neither Trump, nor Mulvaney, nor the majority of members of Congress seem to be discussing is whether raising or eliminating the tax max would provide a long-term solution to a persistent problem. Perhaps because it begs a larger question: Can any issue, even Social Security, inspire everyone to sacrifice more even if they won't benefit directly or immediately?

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