Money Matters: Raise the Damn FICA Cap!

There will be only a short period between the January swearing in of new members of the House of Representatives and, subsequently, their new leadership, before the din of another presidential campaign will crowd out public debate over new policy. Given the split control of Congress, it is also highly unlikely that substantial bipartisan efforts will succeed. Even if some do, there is particular benefit for progressives in putting forward carefully crafted ideas that help redefine our profile in the coming years, just as the big fight over privatizing social security did some years ago. By holding the line, Democrats were seen as the protector of seniors and others in ways that profoundly affected subsequent elections. While that was a negative action that prevented something bad from happening, carefully thought through proposals for new legislation can do the same, even if the Republican Senate buries them.

Most observers believe that the Democrats’ defeat in 2016 resulted in part from Trump’s ability to convince rural and working class people that he represented their interests better than any of the intrenched powers in DC or, for that matter, the Democratic Party as a whole. (See Arlie Hochchild’s excellent Strangers in Their Own Land for an excellent analysis of this.) In a fashion not dissimilar to what Reagan achieved in the 80’s, union members, working people, and farm country abandoned progressives in search of a voice that would address their interests. We could spend hours debating how and/or why the Democratic Leadership Council ( DLC) politics of the 90’s and the Clinton/Obama embrace of Wall Street contributed to this sad circumstance, but when one peels back the veneer of both major parties, it is pretty obvious that what Democrats stand for is far friendlier to working families than the GOP policy. Social security, medicaid/medicare, unions’ and workers’ rights, and government support for public education and infrastructure rebuilding are central to only one party. I’ll let you guess which. I would argue that at least one relatively simple and highly popular position could help the Democrats recover a little bit of that working class love they used to sport.

A friend recently argued that things are so dicey for low and moderate-income people that they will keep voting out whoever is in power just to continue to send a message to DC that for most working Americans, things are not good. This of course would lead to the conclusion that Democrats only have to sit back and let the Republicans fail (and they are doing a pretty awesome job of it so far), but unless we get serious
about undoing the damage to the connection between Democrats and working people, it bodes poorly for any durable ability to govern.

So the recommendation is simple: choose several policies that we can spotlight in the House that help reshape perspectives. Nancy Pelosi is already talking about several - infrastructure, fixing the Affordable Care Act (ACA) and the like, but here’s one I haven’t heard from anyone yet: reform of the payroll tax. Before diving into the details, it’s worth noting the rising popularity of an idea called Universal Basic Income or UBI. A February 28, 2018 report from a CNBC poll shows that 48 percent of Americans support UBI - up a remarkable 36 points from a decade earlier when support hovered around 12 percent. Perhaps the Great Recession had an impact? The idea as kicked around in tech circles tends to paint a gauzy picture of a government with a far simplified safety net if virtually everyone received a monthly $1000 check. Some are so convinced they are backing pilot studies in Canada, Finland, and Kenya. Even India is considering some approach to UBI. Perhaps it’s a bit like the sudden acceptance of the word socialist in center and left political conversation. (The right, though, tenaciously holds on to the dire threat of class warfare if socialist workers gain too much power.)

Perhaps like marriage equality, public sentiment, driven in no small part by young people, will shift rapidly on UBI. Certainly, the decline of the Middle Class will have a role in this, and all the measures suggest this has and will continue to affect our political and social dialogue, but I still think it unlikely UBI will show up on the Congressional “to do” list for some time. The payroll tax, though, could and should.

FICA — Cornerstone of the New Deal

A big hunk of one’s paycheck that’s deducted each pay period is called the Federal Insurance Contributions Act or FICA and covers both Social Security and Medicare contributions from individual workers. The thing is, beginning in about 1990 during the Reagan/Bush era, Congress capped the percentage of wages or earned income of self-employed people that was taxable for FICA. In the case of wages, the taxes are split between employee and employer; the self-employed pay the full amount of roughly 15.5 percent.

In the law, FICA is not really considered a tax because the benefits one collects at retirement are connected to the amount of contribution one has made. On the other hand, courts have ruled that one’s contribution through FICA is not considered a property right. We are all a bit confused by why a payroll tax is not considered a tax, per se, but we can all agree that there are real dollars that leave our paychecks every period and then, somehow, miraculously when we retire, there is a benefit we collect. Either way, this program helped people survive the depression and social insurance has been a fixture of our political economy ever since, despite the never-ending critique from the GOP that it is going broke and ought to be privatized.

But regardless of whether it’s a tax or a program, its design has an inherently regressive aspect in that it only taxes one’s wages up to a certain limit - currently around $120,000. Some argue that because the benefits are common, lower-income people receive more than they put in and that higher paid people put in more than they collect. However, it is not a pension or annuity program - it is social insurance, the premise of which is that people past retirement age, or disabled before they get there, ought to have at least basic income for bare essentials.
John Miller’s excellent article, Go Ahead and Lift the Cap (March/April, 2008 Dollars & Sense) on this debate suggested that Social Security had reduced the poverty rate among the elderly from 35 percent in 1960 to 9.4 percent in 2006.

While it may be hard to argue that people in New York or San Francisco can live off social security income, the fact is that it is the only way at least half of Americans will be able to retire. My friend Bob Borosage just shared the astonishing fact that the median amount of savings for retirement in America is exactly $0, and the Economic Policy Institute in 2017 reported the median retirement savings at $5000. In other words, my GOP friends, all that most people have is Social Security and Medicare as they age, so any attempt to cut the programs will have vast political repercussions.

So what is the opportunity here? While it rises slowly, the cap on wages taxable for Social Security limits both revenue and social equity. Currently, the cap for 2019 is set to be $132,900, meaning that any wages earned above that amount are not subject to the FICA tax of 6.2 percent nor is the employer taxed above that amount. In other words, your average person earning under that cap pays the full 6.2 percent but the high-income person stops paying so averages a much smaller FICA burden depending on just how much more than the cap that they
earn. According to a 2013 Congressional Budget Office (CBO) report on the FICA cap, when the program was established in 1937, roughly 92 percent of earnings from jobs were subject to the tax. This amount has varied a good deal over the years and by 1965 had fallen to 71 percent of wages, then rose again to 90 percent in 1983, only to fall again back to 83 percent in 2011. That same CBO report also suggested that lifting the cap would provide more revenue (obviously) and would reduce the deficit by close to $500 billion.

Several years ago, in the middle of the debate over an estate tax, Bill Gates Sr. became one of the most articulate proponents for maintaining it. His argument was simple. His son couldn’t have created Microsoft anywhere else. America, to be the host for entrepreneurs, had to have a vital society that educated its people, created safe communities where ideas could flourish, and had mechanisms to redistribute the disproportionate earnings that a dynamic, innovative economy would produce. It is hard to argue that there is anywhere else on the planet where as much creative, dynamic energy is released in the economic arena, but it is threatened when income disparities erode social mobility and entrenched interests greedily hang on to their winnings in gated communities. As Gates used to put it, the taxes we pay are our “dues” to be part of this remarkable society.

If we all benefit from having a program that takes care of those who haven’t been able to address their own retirement needs, then why should higher income people not pay into the system with a higher-level cap or no cap at all? It should be possible to slowly remove the cap entirely while possibly reducing the rate of the tax. This needs some proper econometric analysis, but what if we could lower the rate by a point or two and replace those dollars by letting the tax apply to all earned income? I think it could make for a very compelling case to working people that the Democrats want to raise taxes on the richer, higher income folks, while lowering the tax on lower incomes. That’s dollars directly into their pockets, and probably far larger dollars that the paltry Trump tax cuts that were essentially a non-factor in the most recent cycle. It would make the GOP apoplectic while helping to re-establish that Democrats actually have a care for working people.

The tax system has been the primary objective of “smaller government” Republicans that seem to think that America belongs to the job creators and not those who work in those jobs. The Clintons’ embrace of DLC globalist trade policies may have boosted some parts of the economy, and helped investors and mega-corporations, but they arguably screwed working people. On top of that, when the Obama people, albeit with a GOP Congress, chose to rescue the banks and let homeowners get foreclosed on in the thousands, the Democrats enabled the inverted politics of Trump nationalism. It’s time to paddle in a different direction.

Drummond Pike, a frequent Organizers’ Forum participant and contributor to these pages, was the founder and CEO of Tides in San Francisco, and continues to be involved in philanthropy and social change.

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