October 5, 1971
Page 34973
By Mr. MUSKIE (for himself and Mr. MONDALE)
S. 2656. A bill to amend chapters 2 and 21 of the Internal Revenue Code of 1954, and title II of the Social Security Act, to reduce social security tax rates and provide a new method for their determination in the future, to remove the dollar limitation presently imposed upon the amount of wages and self-employment income which may be taken into account for tax and benefit purposes under the old age, survivors, and disability insurance system (making allowance for personal income tax exemptions and the low-income allowance in determining such amount for tax purposes), and to increase benefits under such system to reflect the new tax and benefit base. Referred to the Committee on Finance.
PROPOSED PAYROLL REFORM TAX LEGISLATION
Mr. MUSKIE. Mr. President, today I am introducing, with Senator MONDALE, a bill which would make fundamental and far-reaching improvements in the payroll tax. This bill would build into the payroll tax the principles of equity and progressivity which are the foundation of any enlightened tax system. This bill would reduce the amount of Federal taxes paid by 63 million American families.
The present payroll tax system, establishing a flat tax rate of 5.2 percent on earned income up to a ceiling of $7,800, places a disproportionate burden of the financing of social security upon the lower- and middle-income wage earner. For the working man making $7,800 per year, the effective tax rate is 5.2 percent, while for the man making $50,000, the effective tax rate is 0.8 percent. Furthermore, the lack of exemptions and low-income allowance add to the regressive nature of the payroll tax.
Because the burden of the payroll tax is focused on the low- and middle-income worker increases in the payroll tax in recent years have largely eliminated the tax relief Congress attempted to extend to these Americans. Furthermore, at rates proposed by H.R. 1, the payroll tax burden will be larger in 1973 than the personal income tax burden for the average family of four with an income of $13,900 or less.
In order to remedy this situation, we are introducing legislation today to make the payroll tax progressive by eliminating the ceiling on taxable earned income and providing personal exemptions and low income allowance equal to those allowed for income tax purposes. Second, the legislation fixes the level of the payroll tax rate at the rate necessary to bring revenues into annual balance with benefits paid.
The social security system was one of the signal achievements of the New Deal. Instead of facing destitution and the dole, the retiring American now is guaranteed some measure of economic security. Without the benefits provided by the social security system, 19 out of every 20 beneficiaries would not have achieved even a moderate standard of living. Social security helps to keep at least 10 million Americans out of poverty. Presently, about one out of every eight Americans receives social security cash benefits every month.
In 1971, more than 26 million families will receive social security benefits. Those benefits will total more than $34 billion. Covering virtually all of the Nation's workers other than Government employees, and railroad workers who receive the protection of separate programs, the social security system guarantees income support on retirement and important medical coverage. It affords financial protection against disability. And it assures aid to the survivors of deceased workers.
Social security did not spring into being in its present form. When he signed the original social security legislation, Franklin Roosevelt called it "the cornerstone of a structure which is far from complete." With broad bipartisan support, subsequent Congresses and administrations have extended that structure and improved it. Much has been done. We can all take very great pride in what has been accomplished.
But that pride in our existing social security system must not lead us to forget that the system can be improved – and must be improved – as our wealth increases and as our understanding of the system and the needs of its beneficiaries grows. In H.R. 1, the House of Representatives recently approved an increase in social security benefits. The Senate has begun its own deliberations on the expansion of social security benefits. I have no doubt that, like the House, the Senate will approve important increases in benefits – and I hope make those increases more substantial. As I have in the past, I intend to support such increases. And, whatever the Congress does this year, urgent need will remain for further attention to the sufficiency of the economic protection which social security affords.
Despite the achievements of the social security system, too many of our elderly citizens are trapped in the prison of poverty, because social security benefits are inadequate to provide a dignified retirement. Sixty percent of our elderly who are living alone are also living in or near poverty. They are three-fifths of a generation who heard a promise made, and now see the promise falling short. A drastic infusion of funds is needed to rescue many of our senior citizens from a life of poverty. Retirement must be a reward, not a punishment.
To achieve a substantial increase in benefits, I believe that there must be some form of general revenue financing for social security. General revenue financing has been advocated since 1937 when it was recommended by the first Advisory Council on Social Security. Delay in enacting this recommendation has meant needless poverty for millions of elderly Americans. We must work to end that delay, to eliminate that poverty and to provide substantial increases in social security benefits through the use of general revenues.
But today I wish to address myself to a different part of the social security system – not its benefits, but the mechanism by which those benefits are financed. One source of the continuing strength of the social security system has been that a special tax is set aside to finance it – the payroll tax. When a worker is employed in a covered occupation, he knows that with each paycheck he and his employer are contributing to the support of old people, the disabled, and survivors today so that he and his dependents will enjoy the same kind of protection tomorrow.
Small in its first years, the payroll tax has now become one of the largest components of the Federal tax system. It produces more revenue than the corporate income tax. Indeed, it produces more Federal revenue than any tax other than the individual income tax. This year it will raise $47 billion.
The payroll tax achieved its present importance in the Federal tax system very quickly. It is, in fact, the most rapidly growing Federal tax. In 1950, it produced only 5 percent of Federal revenue. Today it has produced to 23 percent of Federal revenue. According to current forecasts, by 1976 the payroll tax will yield more than $80 billion – or 25 percent of all Federal revenue for that year.
While the magnitude and impact of the payroll tax have grown rapidly, the essential structure of the tax has changed very little since the original adoption of social security. The tax is still imposed on the first dollars a worker earns each year up to a specified ceiling. The tax makes no allowance for the size of the worker's family; it applies whether or not the worker's family is below the poverty level; and it does not increase as the worker's earnings rise above the wage base.
The characteristics of the payroll tax created few serious inequities when the tax was first adopted. The tax was then very small. The tax rate applicable to workers was only 1 percent, and the initial $3,000 wage base included 95 percent of all earnings of the workers covered.
But the payroll tax rate has risen sharply. It is now 5.2 percent for the worker and 5.2 percent for his employer. Under the present form of H.R. 1, it would rise to 5.4 percent and increase further to 7.2 percent by 1977 for both worker and employer. We are taxing a smaller proportion of income with steadily higher rates. In short, we are financing one of our society's most progressive programs with an increasingly regressive tax.
The form of the payroll tax has not changed substantially during a time of vast economic change. The result is serious inequities. Despite the 1969 congressional recognition of the principle that people below the poverty level ought not to pay income tax – and despite the reaffirmation of that principle last week by the Ways and Means Committee in its increase of the low-income allowance – payroll tax continues to be exacted from workers who are below the poverty level.
The payroll tax applies without regard to the number of children or other dependents whom a worker must support. The single individual whose earnings are $20,000 a year pays precisely the same payroll tax as the married couple who are supporting five children on an income of $7,800, despite the broad difference in their real ability to pay tax.
The effective rate of the payroll tax declines as a worker's earnings rise above the ceiling on the wage base. The school teacher earning $7,000 a year pays 5.2 percent of her earnings in payroll tax. The engineer earning $25,000 pays about 1.6 percent of his entire earnings, and the business executive earning $100,000 pays about four-tenths of 1 percent. While each of those workers becomes eligible for the same social security benefits, they simply cannot afford to pay the same amount for those benefits.
Finally, the payroll tax hits harder at families in which there are two wage earners than at families which derive the same income from a single wage earner. Again, the consequence is a major difference in tax burdens which has no relationship to differences in ability to pay.
Thus the payroll tax which began under very different circumstances has become unfair. Those who can least afford it must pay the same amounts as those who need not worry about the burden. And low- and middle-income Americans are near the limit in paying taxes. Under the present system, they face the frightening prospect of inequitable tax increases to finance a vain attempt to provide adequate benefit levels.
The payroll tax has wiped out much of the tax reductions that Congress passed in 1969. Because the burden of the payroll tax is focused upon low- and middle-income workers, increases in the payroll tax in recent years have reduced sharply – and in some cases offset entirely – the tax relief which Congress has attempted to extend to these groups in the income tax system. Despite the major income reductions of 1964 and 1969, the total Federal tax load of the low- and middle-income worker is little lower now than it was in 1963. Indeed, by reason of the payroll tax increases, the single worker with $3,000 of income will pay more total Federal tax in 1973 than he paid in 1963. He Will do so despite the fact that, because of general increases in prices and wages, he has become poorer both absolutely and relatively.
Americans have been willing to accept the payroll tax – and its increases – because they have recognized that its current tax burdens will lead to future benefits, for themselves and their families. On these terms, social security has seemed a good buy – and it is. But we can have the same buy, and the same benefits, financed by a fairer and sounder payroll tax. We must change the social security taxes to make them fairer. We must change them so the limits on the ability of many Americans to pay more taxes will not deprive older Americans of needed increases in benefits. And we must strengthen the payroll tax to make the whole social security system stronger.
To achieve that end, Senator MONDALE and I are introducing legislation which would make key changes in the payroll tax. In order to make the payroll tax progressive, our legislation would make these changes:
First. The wage base upon which a worker is taxed would be reduced by dependency exemptions equal to those allowed him for income tax purposes.
Second. Further, the worker's tax base would be reduced by an amount equal to the low-income allowance provided by the income tax law. Under current law, the low-income allowance will reach the level of $1,000 on January 1, 1972. Under an amendment approved by the House Ways and Means Committee last week, the allowance would be increased to $1,300.
Third. The ceiling on the wage base would be removed. Hence, to the extent that they exceed dependency exemptions and the low-income allowance, all of a worker's earnings from covered employment would be subject to the payroll tax.
Fourth. The wage base ceiling would also be removed for the payroll tax paid by employers, but for reasons of administrative convenience, neither dependency exemptions nor the low-income allowance would be applied in the computation of the employer tax. However, continuing the principle of the existing payroll tax that equal contributions should be made by employers and employees, the rate of the employer tax would be set to produce approximately the same amount of revenue as the employee tax.
Fifth. The removal of the ceiling on taxable earnings would be accompanied by an elevation in the amount of earnings counted in computing benefits from $7,800 – the ceiling applicable under current law – to $20,000. This modification will provide improved retirement benefits for millions of middle-income Americans for whom social security benefits are insufficient to prevent a drastic decline in income upon retirement. Expanding upon a principle already used in the existing benefit system, the proposal would phase down benefits earned as income rises so that the major benefit increases would occur in levels of income under $10,000 and lesser increases would occur in the $10,000 to $20,000 range.
Our proposal would also change the payroll tax rate by fixing it at a level which brings revenues produced into annual balance with benefits paid.
With these changes made in the tax structure, the payroll tax rate would be established at the level necessary to finance the increased benefits provided in H.R. 1. To support the benefit provisions contained in the current form of H.R. 1, a tax rate of 5.2 percent would be necessary for the employee's tax. That rate compares with the H.R. 1 rate of 5.4 percent for 1972 through 1974, 6.2 percent for 1975 and 1976, and 7.2 percent for 1977 and thereafter. A tax rate of approximately 4.5 percent on employers would produce approximately the same revenue as the employer tax under H.R. 1. The tax rate of the self-employed would remain at 7.5 percent.
These changes would bring major and fundamental improvement to the payroll tax. Under them, 63 million Americans would pay lower taxes. Only 8 million high-income Americans would pay more. Persons at or below the poverty level would be sheltered from payroll taxes altogether. And the relief would extend well into the middle- and upper middle-income ranges. Every family of four with earnings of $14,500 or less would save money. Every married couple with earnings of $13,000 or less would save money. Every single person with earnings of $12,250 or less would pay lower taxes. Furthermore, at every income level up to $25,000, more people would save on their taxes than would pay increased tax.
In broad and important income ranges, the amounts of the tax savings under the proposal would be substantial. Compared with the tax liability called for in H.R. 1, a four-person family at the poverty level will save $200 in taxes – or 100 percent of its prior Federal tax liability. A worker earning $7,500 and trying to support a wife and four children will pay $300 less – a saving of 44 percent in his Federal taxes. A salesman earning $8,000 and his school teacher wife earning $7,500 who support two children wih save $240.
Let me emphasize that the proposal which Senator MONDALE and I make today is aimed at the taxation machinery of the social security system. It would reduce no one's social security benefits. In fact, it increases in benefits for many Americans by incorporation of earnings between $7,800 and $20,000 in the benefit computation. And it makes future benefit increases more likely by improving the equity of the tax which finance them.
Furthermore, let me emphasize that the proposal leaves the present structure of the social security system intact. The payroll tax would remain the financing mechanism of the system. Revenue produced by that tax would continue to be transferred to the social security trust fund. Social security benefits would continue to be paid from that trust fund. If Congress should decide to finance future social security benefits increases from general Federal revenues, as I hope it will, our proposal would not impede that step.
Within the area to which it is addressed, however, the proposal would accomplish broad-scale improvement of the payroll tax. It would shift the burden of that tax from the low-income and the middle-income worker to those who have greater ability to pay the tax. In doing so, it would make today's payroll tax fairer and sounder; and it would facilitate future increases in social security benefits by making it possible to increase payroll taxes without imposing unacceptable burdens upon low- and middle-income families. No longer would a decent income for the elderly depend on an indecent increase in the tax burden of the working.
By submitting this legislation, we draw attention to a long-neglected area of economic injustice affecting almost every working American. A nation that is fair cannot tolerate a tax which makes no allowance for real difference in ability to pay. Enactment of the legislation that Senator MONDALE and I are proposing would allow this country to make social security benefits more generous and burdens more equitable. This legislation, aimed at our second largest tax – a tax which many millions of American workers pay every 2 weeks – would constitute a fundamental and important contribution to the continuing effort to strengthen and improve our Federal tax system.
Mr. President, I ask that additional material be inserted in the RECORD which further details Muskie-Mondale payroll proposal. First, there is a brief fact sheet and explanation of the proposal. Next, there is a series of tables showing the different taxes that would be paid by various groups of wage earners under our proposal compared to H.R. 1. Finally, there are tables showing the percentage and amount of Federal taxes paid by specific taxpayers from 1963 to 1973.
There being no objection, the material was ordered to be printed in the RECORD, as follows:
FACT SHEET OF THE MUSKIE PAYROLL REFORM PROPOSAL
I. PURPOSE
The proposed legislation would make fundamental and far-reaching improvements in the payroll tax. The present payroll tax, established a flat rate of 5.2 percent on earned income up to a fixed ceiling of $7,800 a year, is highly regressive. Under the existing law, for the working man making $7,800 a year, the effective payroll tax is 5.2 percent, while for the man making $50,000 a year the effective payroll tax rate is .8 percent. The regressive nature of the tax is increased because neither exemptions nor deductions are allowed.
Because the burden of the payroll tax is focused on the low and middle income worker, in recent years increases in the payroll tax have largely eliminated the tax relief Congress attempted to extend to these groups both in 1964 and in 1969. Furthermore, at rates proposed by H.R. 1, the payroll tax burden will be larger in 1973 than the personal income tax burden for the average family of four with an income of $13,900 or less.
II. PROPOSAL
To provide for a more equitable and progressive payroll tax, the proposed legislation would:
1. Remove the ceiling on the wage base.
2. Allow exemptions equal to the personal exemptions provided for income tax purposes.
3. Allow a low income allowance equal to that provided for income tax purposes.
4. Adopt the recommendations of the 1971 Advisory Council of Social Security that the payroll tax rate be fixed at a level which brings revenues produced into annual balance with benefits paid.
With these changes made in the tax structure, the payroll tax rate would be established at the level necessary to finance the social security benefits decided upon by Congress. To support the benefits provisions contained in the current form of H.R. 1, a tax rate of approximately 5.2 percent would be necessary compared with the rate of 5.4 percent proposed by H.R. 1.
III. EFFECTS
The payroll tax reform legislation leaves the present structure of the social security system intact.
Under this proposal 63 million American families would pay lower taxes in 1973 than under H.R. 1. Eight million high income Americans would pay more. Every family of four with earnings of $14,500 or less would pay less in taxes. Every married couple with earnings of $13,000 or less would pay less in taxes. Every single person with earnings of $12,250 or less would pay less in taxes. At every income level up to $25,000, more people would save taxes than would pay increased taxes.
The use of exemptions and low income allowance makes the tax much more responsive to real differences in ability to pay. The removal of the ceiling increases the responsiveness of the tax base to changes in wage and price levels. This proposal builds into the payroll tax the principles of equity and progressivity which are the foundation of any enlightened tax system.
EXPLANATION OF PAYROLL TAX REFORM PROPOSAL
1. Adopt exemptions and low income allowance.
Under present law, all earned income up to $7,800 is subject to tax. No exemptions or deductions are allowed.
The proposal would allow exemptions for employee payroll tax purposes equal to the personal exemptions showed for income tax purposes – $750 per person beginning in January, 1972, under the September 23 action of the Ways and Means Committee. In addition, the employee would be permitted a deduction equal to the low income allowance permitted for income tax purposes.
Married couples filing jointly and single individuals would receive the full deduction; married wage earners filing separately would each be allowed a $500 deduction. The self-employed would receive personal exemptions and the low income allowance under the same rules applicable to employees. For reasons of administrative simplicity, neither exemptions nor the low income allowance would apply in the computation of the tax on employers.
2. Remove ceiling on wage base.
The present tax is imposed on both employer and employee only on earnings up to $7,800. The self-employment tax is subject to the same ceiling. Increases already scheduled under current law will raise the ceiling to $9,000 in 1972 and thereafter. H.R. 1 would raise the ceiling to $10,200 for 1972 and provide for automatic increases in later years based upon increases in the cost of living.
The proposal would eliminate these ceilings. Hence, to the extent that they exceed dependency exemptions and the low income allowance, all of a worker's earnings from covered employment would be subject to the payroll tax. Similarly, to the same extent, all earnings from covered self-employment would be subject to the payroll tax. For purposes of the payroll tax on employers, all covered wages would be included in the wage base, and no reduction would be made for personal exemptions and the low income allowance.
The payroll tax would apply, as at present, only to "wages" and "self-employed income" as defined under the Social Security law. Other types of income would not be taxed. The present law exclusions for the earnings of Federal government employees, most of whom are covered by the Civil Service Retirement system, and railroad workers, covered under the Railroad Retirement Act, would be continued unchanged.
3. Adoption of recommendations of Advisory Council on Social Security.
Under present law, the payroll tax produces revenue each year beyond the amount necessary to pay Social Security benefits. for that year. The surplus for 1973 is projected at $6.1 billion. The Advisory Council on Social Security has recommended that the payroll tax rate be fixed to place the Social Security paid on a pay-as-you-go-basis. In general, under this recommendation, Social Security revenues would equal benefits on an annual basis.
The proposal would adopt the Advisory Council's recommendation.
4. Raise benefit ceiling.
Under present law, benefits rise, though less than proportionately, as average taxable earned income rises, up to the ceiling.
The proposal would accompany the removal of the ceiling on taxable earnings with an elevation in the amount of earnings counted in computing Social Security benefits. The increase would be from the present maximum level of $7,800 to $20,000. The proposal would phase down benefits earned as income rises, so that levels of income above $10,000 would produce declining percentages of benefits.
5. Reduce payroll tax rate.
Under present law the payroll tax rate for 1971 is 5.2 percent for employees, 5.2 percent for employers, and 7.5 percent for the self-employed. Under H.R. 1, the tax rate on employees and employers would be raised to 5.4 percent for 1972-74, 6.2 percent for 1975-76, and 7.2 percent for 1977 and thereafter.
The proposal would lower the tax rate to that which, in conjunction with the amendments described above, is necessary to fund the increased benefits provided in H.R. 1. The employee tax rate necessary to finance the benefits provided in the current form of H.R. 1 would be approximately 5.2 percent. Similarly, 4.5 percent tax on employers – applied to wages without a ceiling and unreduced by exemptions and the low income allowance – would produce the same revenue as H.R. 1's 5.4 percent employer tax on the first $10,200 of earnings. If benefits are set at H.R. 1 levels, the proposal would leave the present 7.5 percent tax rate on self-employment income unchanged.
To fund both the benefits provided for in H.R. 1 and those which would result from raising the ceiling for benefit purposes to $20,000, as proposed, an employee tax rate somewhat higher than 5.2 percent would be necessary for 1975 and later years. However, that rate would be substantially below the H.R. 1 rates of 6.2 percent for 1975-76 and 7.2 percent for 1977 and thereafter. The necessary actuarial computations can be performed by the Social Security Administration at the request of the Committee on Finance.
Mr. MONDALE. Mr. President, along with the distinguished Senator from Maine (Mr. MUSKIE), I am introducing today a bill to reform fundamentally our method of financing social security.
As David Broder pointed out recently, Congress has all but ignored the increasingly heavy burden of social security taxes
Discussing the inequities of payroll taxing may not attract as much praise at Georgetown cocktail parties as a ringing denunciation of the bombing in Laos or the tactics of the Washington police.
But it is equally worthy of our attention.
The problems posed by the payroll tax are only part of the much larger problem of tax equity.
Three years ago, the Secretary of the Treasury predicted a taxpayer's revolt. Congress responded to the popular outcry by passing the Tax Reform Act of 1969.
This was a step forward.
Yet today, our tax system is still appallingly unfair.
Contrary to myth, it is not progressive. Rich people, poor people, middle-income people – all pay about the same portion of their income in taxes. According to a recent study by the Chief of the Census Bureau's Population Division, the worker making under $2,000 pays an average of 40 percent of his income in taxes to all levels of government. The worker in the $2,000 to $50,000 range pays a few percentage points less. Workers with income over $50,000 pay a few percentage points more.
Our tax system – taken as a whole – bears no relation to ability to pay.
The average man earning $6,000 – barely enough to support a family, and below the Labor Department's low-income budget – pays taxes of $1,600.
Meanwhile, one of every 20 people who made $1 million in 1969 went tax-free. The 20 largest oil companies contributed only 8½ percent of their incomes to the Treasury.
Inequities like these make our tax system a national disgrace.
And the disgrace is deepening. Our tax system is actually becoming more regressive.
At the heart of the problem is the payroll tax.
The Federal tax system is composed of three main taxes: two that are progressive – the corporation income tax and the personal income tax – and the regressive social security tax.
Unfortunately, the social security tax has been growing faster than the other two combined.
Over the last 10 years, as personal income taxes have been cut on several occasions, the average taxpayer has simply watched payroll taxes absorb the difference.
The result is that an increasing share of the Federal tax burden is falling on poor and middle income wage earners. The worst is yet to come.
If – as appears likely – the House passed social security provisions in H.R. 1 become law, on January 2, 1972, the American worker will receive the largest payroll tax hike in history.
According to Professor Pechman, $1.5 billion in social security taxes is being paid this year by persons officially classified as poor. With H.R. 1, the poor will pay much more.
At present, the family of four earning $3,000 pays $156 in payroll taxes. By 1977, with the increases scheduled under H.R. 1, it will be $216.
This is wrong and utterly senseless. Everyone agrees on the importance of alleviating poverty. Numerous programs have been devised to cope with the problem. But every year, we force the poor to pay 40 percent of their income in taxes.
For the middle-income worker, the prospects are little better.
The man earning $10,000 – close to the average, and less than the Labor Department says is needed to support adequately an average urban family – is already paying total taxes of $2,700.
By 1977, under H.R. 1, his payroll tax will roughly double – to $755.
The bill that Senator MUSKIE and I are introducing today brings a measure of fairness to the Social Security System.
It recognizes the elementary fact that poor families and large families simply cannot afford to contribute as much to social security as the rich.
The Mondale-Muskie proposal would: Remove the $7,800 ceiling, making all earned income subject to the payroll tax. At present, the payroll tax is imposed on only the first $7,800 of a person's earnings; and
Allow wage earners a standard deduction of $1,000 and exemptions of $650 for each family member in calculating the tax. Thus, a married worker with two children earning $8,000 in 1971 would pay payroll taxes on only $4,400.
Our bill would also allow the payroll tax to be set at 5.2 percent – lower than the 5.4 percent that would go into effect with the passage of H.R. 1. The employer's tax would be computed on all covered wages and salaries without ceiling; the tax rate would be 4.5 percent instead of the higher rate in H.R. 1.
Overall, about 63 million people would pay lower taxes under our proposal than under H.R. 1. And only 8 million would pay more.
All families of four with earnings below $14,592 would benefit. All married couples without children whose earnings are below $13,092 would get a tax cut.
The accompanying table shows the tax savings that would result from our proposal for a family of four.
Savings are $216 at $4,000 of earnings, $222 at $7,000, and $228 at $10,000.
For families of four with two wage earners, the savings in the middle incomes are even greater. Such families would benefit from the reform if their income is $25,000 or less.
Mr. President, I ask unanimous consent that a table be printed at this point in the RECORD.
There being no objection, the table was ordered to be printed in the RECORD, as follows:
[TABLE OMITTED]
Mr. MONDALE. Mr. President, our proposal has a number of additional advantages.
First, because our tax is truly progressive, we could afford to greatly increase benefits without imposing an indefensible burden on the average worker.
Second, our tax base is much more elastic than the present Social Security tax base. As income grows, tax revenues will grow more than in proportion.
We will then be able either to cut the tax rate, or to finance greatly increased benefits without any increase in the tax rate.
Third, our approach will deal fairly with families containing two wage-earners. At present, a family with two earners may have to pay almost double the tax paid by a single-earner family with the same income.
Finally, our reform will increase work incentives for welfare recipients. Under the House-passed welfare bill, the tax rate for welfare recipients is 67 percent – or every dollar they earn above $720, the welfare payment declines by 67 cents. But if social security taxes are included, the tax rate rises to about 74 percent.
In my judgment, the tax rate in the welfare bill already removes much of the incentive to otbain work. Our proposal would keep the tax rate down; it would encourage welfare recipients to find jobs.
Some people may object that our approach violates the insurance principle – that it would pay benefits to people who have not contributed to the system.
The fact is, however, that even now social security is far removed from a strict insurance system. We already pay benefits to people who have paid little or nothing in payroll taxes. And for most people, benefits are out of proportion to their contributions.
As Professor Pechman has written: The relationship between individual contributions (that is, payroll taxes) and benefits received is extremely tenuous.
Our proposal is wholly consistent with one of the first principles of the social security system.
Removing the ceiling returns us to the situation at the inception of social security when almost everyone – 93 percent of all wages and 97 percent of all wage earners – was below the ceiling. In recent years, only 75 to 80 percent of all wages have been taxable.
Nor would the Mondale-Muskie bill create administrative problems. We would continue to withhold social secucing rity taxes; payments would continue to be earmarked for the social security trust funds; the present relationship between contributions and benefits would remain essentially unchanged.
The approach that we are advocating has its precedent in the experience of other countries. Germany exempts low income workers from social security taxes, as does Japan from the national pension tax. Many countries have no ceiling on earnings subject to tax, and many use a contribution from general revenues to finance benefits.
In this country, there have been numerous proposals to introduce general revenues into the social security system. The idea was recommended by the Committee on Economic Security, whose work led to the Social Security Act of 1935. This recommendation was reiterated by the Advisory Councils on Social Security of 1938 and 1948. The labor movement has for some time supported a plan to finance one-third of the system from general revenues. And several proposals along these lines have been introduced in recent Congresses.
These past efforts have had the same goal as ours today – to bring relief to lower and middle- income workers.
But what we are proposing today is much more than a contribution from general revenues. What we are proposing is much more than a patchup job for the inequities of the payroll tax.
Even if one-third of social security benefits were financed out of general revenues, that would still leave two-thirds to be financed by one of the most regressive taxes in our tax system.
Senator MUSKIE and I have rejected that approach. Instead, we are supporting a comprehensive reform.
Obviously, our approach raises a number of new difficulties. Although many people have devoted considerable effort to developing this proposal, neither Senator MUSKIE nor I are wedded to every detail. No doubt some of the provisions can be altered or improved.
But what is important is that the Congress make a comprehensive review of social security financing. The question is not whether the payroll tax needs to be raised or lowered a few tenths of a percentage point, but whether our whole approach to social security financing makes sense.
I think our proposal makes sense. Its enactment would be an important step toward comprehensive reform of our whole tax system.
It would place the taxpaying burden on those who can afford it, and relieve the load on those who cannot.
It would allow us to provide decent benefits for our retired elderly without imposing an unreasonable burden on our workers.
In short, it would increase economic justice for all our people.
And that must be our first priority in binding up the wounds that so dangerously divide this great Nation.