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Inequality's Threat to Our Fiscal Future

David Callahan

There are a bunch of good, practical arguments for giving low-wage workers a pay hike -- like the fact that putting more money in the pockets of these workers would spur consumer demand and economic growth. 

But here's another strong point that you don't hear much about: Reducing wage inequality is crucial to meeting America's long-term fiscal challenges. 

The connection here is simple enough: Because income above a certain threshold ($113,700 in 2013) is not subject to Social Security taxes, the concentration of so much income at the top means that the government is collecting lower revenues than would be the case if income were more evenly distributed. 

Consider a concrete example: David Novak, the CEO of Yum! Brands, the giant fast-food restaurant conglomerate, made $55 million last year between stock options, salary, and perks. Roughly 1/500th of that compensation was likely subject to Social Security payroll taxes paid by Novak and Yum! Brands. (The Medicare portion of payroll taxes has no cap, but the rate is much lower.) 

If Novak makes the same huge paycheck this year, he and Yum! Brands will likely pay around $14,000 in Social Security taxes.

Now consider a different scenario. Let's imagine that Novak only makes $5 million this year, while workers at Taco Bell, Pizza Hut, and other restaurants owned by Yum! Brands get a combined wage hike of $50 million. Because all these workers likely make under $113,000 a year, that entire addition to Yum! Brands' front-line payroll will be subject to Social Security taxes. 

In this shared prosperity scenario, Yum! Brands and it's workers would pay $6.2 million in Social Security taxes. 

Okay, I know this is rather crude example, but you get the point. And if you extrapolate out this scenario more broadly, we're talking real money. For every $100 billion in income now exempt from Social Security payroll taxes that could annually get shifted downward below that cap, the government would pick up $12.4 billion in extra payroll taxes to bolster Social Security for the long term. For every trillion dollars that could be shifted below the cap, the government would pick up $124 billion annually. 

As I said, Medicare is another story because there is no cap on this portion of payroll taxes and, with the new Medicare tax surcharge that's part of Obamacare, the wealthy are paying lots into this system. 

But when it comes to Social Security, it's time that more national leaders begin to point out that reducing income inequality would be an important step toward bolstering the finances of this vital social insurance system.

Yet one more reason that low-wage workers should get a raise.