Is Flat Wealth Tax the Social Security Solution No One Is Talking About?
One of the talking points in the current debate over Social Security reform is the role wealthy Americans should play in bolstering the program. Much of the talk centers on raising the annual income threshold on wages subject to Social Security payroll taxes, which is currently $160,200. Some have suggested increasing that limit to $250,000 or higher.
But others have floated the idea of imposing a flat wealth tax on the rich to help finance Social Security before its trust fund runs out of money. With a wealth tax, the government taxes assets instead of income, MarketWatch reported. Those who favor a flat wealth tax to help fund Social Security point to its simplicity as well as the fact that those who would have to pay it can probably afford to do so.
One thing that’s clear is that something has to be done to prop up Social Security before its Old-Age and Survivors Insurance (OASI) Trust Fund runs out of money, which could happen as early as 2032. When it does happen, the program will have to rely solely on payroll taxes for funding, and that only covers about 75% to 80% of current benefits.
As MarketWatch noted, wealth taxes have already been adopted elsewhere to help fund government programs. For example, Zurich, Switzerland levies wealth taxes of up to 0.3% on net worth over about $3.5 million. The wealth tax in Geneva, Switzerland, starts at 0.175% and goes up to 0.45% on net worth over about $2 million. These wealth taxes are in addition to income taxes that go as high as 46%.
Proposals to implement a wealth tax in the United States to help fund Social Security — including the one U.S. Sen. Elizabeth Warren (D-Mass.) rolled out as a 2020 presidential candidate — tend to be less ambitious.
But even a much more modest wealth tax could go a long way toward bolstering Social Security, supporters say. Currently, the Social Security Administration borrows roughly 9% of the money it pays out, according to MarketWatch. Within a decade that figure is expected to rise to 21%, and by 2050 it could approach 30%.
Meanwhile, U.S. household wealth has soared to a point that the nation’s richest people can live on capital — savings, investments and other assets — instead of income. This has been going on for decades. In 1989, the richest 0.1% owned 9% of overall U.S. wealth. Today, they own 12.5%.
MarketWatch estimates that a flat 0.3% wealth tax paid by all Americans would generate about $420 billion in revenue this year, based on Federal Reserve data. That’s enough to fill Social Security’s 2023 budget gap and still have about $100 billion left over. If U.S. net worth grows as much over the next decade as it did during the previous decade, a flat wealth tax would be able to fill most of the Social Security budget shortfall on its own.
Those in the top 0.1% (with an average net worth of $136 million) would have to pay about $400,000 in extra taxes, MarketWatch reported. The bottom half would pay an average of $200.
While that sounds feasible on paper, not everyone supports the idea of using a wealth tax to help prop up Social Security. An August 2022 article by Discourse Magazine points out that countries that depend on wealth taxes to help fund government programs — including Denmark, Norway and Sweden – benefit from much higher tax rates than the United States.
“Far fewer taxpayers pay the top rate in the U.S. than in Scandinavian countries,” the Discourse article noted. “In layman’s terms, to align with Scandinavian models, the U.S. would need to broaden its tax base and apply the top income tax rate to the upper middle class as well as the wealthy.”
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In this case, U.S. lawmakers might be hesitant to approve a flat wealth tax to help fund Social Security. Many Americans might not have a problem with the ultra-rich having to pay higher taxes, but could draw a line if the responsibility filters down to those who don’t have millions or billions of dollars saved up.
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