As “make the rich pay their fair share” has been a resounding cry from some corridors in Congress for years, new legislation would enact significant new taxes on people or entities earning more than $400,000, including pass-through businesses, S corps, investors, hedge funds and private partnerships.
The Medicare and Social Security Fair Share Act would apply not only a 1.2% payroll tax on those earning more than $400,000, but would also apply a 12.4% tax on net investment income earnings from active S corporations and limited partnerships, as well as hedge funds and private equity, beginning in 2024.
“Right now, people living off of income from their wealth make no Social Security contributions,” said Sen. Sheldon Whitehouse, the bill’s sponsor, in a statement. Whitehouse, a Democrat from Rhode Island and chairman of the Senate Budget Committee, added, “That’s not fair, and my bill would also fix that. Some wealthy owners of pass-through businesses like hedge funds and private equity firms avoid paying Medicare taxes entirely on much of their income. My bill would close this loophole.”
The net investment income tax would apply to the lesser of net interest income and the excess of modified adjusted gross income (MAGI) above the unindexed thresholds of $400,000 for a single filer and $500,000 for a married couple filing jointly, according to the bill, which was introduced in July.
Currently, the income tax cap for Social Security contributions is $160,200. That needs to change if Americans want to shore up Social Security’s Old Age, Survivors, and Disability Insurance (OASDI) Trust Fund, which, according to the most recent estimates, will be insolvent by 2033, requiring an across-the-board benefit cut of 20%, Whitehouse said.
“Right now, the cap on Social Security contributions means a tech exec making $1 million effectively stops paying into the program at the end of February, while a schoolteacher making far less contributes through every single paycheck all year,” Whitehouse said.
The bill would also require taxpayers with incomes above $400,000 to contribute an additional 1.2% to Medicare and close the loophole favoring higher earners, Whitehouse said.
The reforms in Whitehouse’s bill would extend Social Security solvency 75 years and Medicare solvency 25 years, says Steve Goss, the chief actuary at the Social Security Administration.
While almost everyone agrees Social Security and Medicare are on the road to insolvency, not everyone agrees that Whitehouse’s legislation goes far enough or can shore up each of the funds with income tax hikes alone.
“Some combination of spending reforms and tax increases will ultimately be needed to solve this issue,” says Alex Durante, an economist at the Tax Foundation, a nonprofit think tank focused on tax issues.
“The problem with relying solely on lifting the payroll tax cap, however, is that without an offsetting reform many taxpayers would be facing very high top marginal rates, especially in some states, and that would almost certainly have negative impacts on the economy,” Durante adds.
Maria Freese, a senior legislative representative at the National Committee to Preserve Social Security & Medicare, said by email that her group supports the higher taxes on the wealthy, but it is still reviewing Whitehouse’s bill.
“Adjusting the income cap to bring more revenue into Social Security is crucial, but other reforms are needed, including enhancing benefits across the board and for the most vulnerable seniors,” she said. It also means calculating cost-of-living adjustments for seniors by adopting the CPI-E, the Consumer Price Index for the elderly, she added.
The legislation stands a much higher chance of passage in the Senate than it does in the GOP-dominated House, which has called only for a bipartisan commission to study the issue. Republicans, led by House Speaker Kevin McCarthy, avoided touching Social Security when lawmakers crafted the recent bipartisan compromise to raise the debt ceiling.