Considering the Employer Compensation Tax - Tax Foundation
With Social Security’s looming insolvency now clearly within sight, attention to potential reform measures is building. That shouldn’t surprise anyone, given the short, less-than-six-year runway for Congress to craft a solution to what would be a massive disservice to America’s seniors. As we noted in other posts on the insolvency issue, Congress has a wide range of levers to avoid disaster, many of which focus on strengthening Social Security’s revenue stream.
While popular changes tend to focus on simple ways to boost income, like increasing the payroll tax rate and eliminating the taxable maximum, the negative consequences of these “solutions” are clear. So, what else can be considered? That’s where novel thinking enters the picture, as shown by a proposal from the Committee for a Responsible Federal Budget (CRFB). Their suggestion is to enact an Employer Compensation Tax (ECT)—a change to the employer side of the Social Security revenue equation.
The CRFB ECT Explained
In its Employer Compensation Tax (ECT) proposal, CRFB would call for employers to be subject to a tax on all forms of employee compensation, including all wages above and below the taxable maximum, employer-sponsored insurance, Health Savings Account contributions, employer retirement contributions, stock options, worker ’ compensation premiums, and so on. Under this proposal, the employee side of the payroll tax equation would remain unchanged.
The premise associated with this recommendation is that “a meaningful share of compensation remains untaxed by one or both payroll taxes.” CRFB estimates that this change could eliminate as much as two-thirds of the total long-term funding shortfall. They also suggest an alternative that would lessen this positive impact on the long-term shortfall while reducing the employee payroll tax rate. In CRFB's view, either approach would considerably improve the solvency picture and increase Social Security’s progressivity.
The Tax Foundation Weighs In on ECT
In a post on its website yesterday, Tax Foundation Senior Economist Alex Durante analyzes the CRFB proposal, including modeling results assessing its revenue-increasing potential and its effects on various levels of taxation. The modeling includes effects on the overall economy, as well as potential effects on the tax code associated with compensation.
Read Durante’s in-depth analysis here.
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