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Payroll tax ceiling hasn’t kept pace

July 27, 2009 - Jim Anderson
The Wall Street Journal reports that the total amount of (documented) wages paid in the U.S. in 2007 was $6.4 trillion.

Of that, at least one-third went to people earning more than $106,800, according to a Journal analysis of Social Security Administration data. In 2007, about six percent of wage earners stood above that threshold, which represents the level at which earnings are no longer subject to Social Security taxes.

Over the five-year period from 2002 to 2007, wages for those earning more than the Social Security threshold rose about twice as fast as for those below.

In 2002, the pay of employees receiving more than the Social Security wage base represented 28 percent of the total wages paid. By 2007, that sector accounted for 33 percent of all wages paid.

Also, these figures exclude massive sums that are off the federal radar screen, according to Journal writer Ellen E. Schultz. The numbers exclude such compensation as incentive stock options, unexercised stock options, unvested restricted stock units and certain benefits, Schultz notes.

It appears, Schultz suggests, that the payroll tax ceiling for Social Security hasn’t kept up with the growth in executive pay. The percentage of wages subject to payroll taxes has shrunk to 83 percent, down from 90 percent in 1982.

The Social Security ceiling increases regularly, but it is indexed to the average growth in wages. The percentage of wages subject to payroll taxes is shrinking because the top tier increasingly earns so much more. As the bottom tier (about 94 percent of us) continues to merely inch up in pay, more and more earnings are falling above the taxed threshold.

A year ago, the Congressional Budget Office (CBO) reported that since 1979, the average income for the bottom half of American households had grown by 6 percent. In contrast, the top 1 percent of earners saw their incomes rise by 229 percent.

The top 1 percent of all households got 18 percent of all personal income and paid nearly 28 percent of all federal taxes in 2005, according to the CBO. The top 1 percent in 2005 were those households with income of at least $307,500.


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