Debate: Should Capital Gains Be Subject to Social Security Taxes?

Our tax experts discuss a proposal to impose Social Security payroll taxes on capital gains for the wealthy.

In recent years, proposals have been floated with the goal of ensuring that the wealthiest Americans pay their “fair share” when it comes to income taxes. One of those proposals would aim to eliminate the preferential long-term capital gains tax rate for the highest-earning Americans by also imposing Social Security payroll taxes on those capital gains.

While proposals vary, one would apply Social Security tax rates on top of existing capital gains rates for taxpayers with income (including capital gain) that exceeds $1 million for the year.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about proposals to apply Social Security taxes to the capital gains of high-income taxpayers.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink
Byrnes

Their Reasons:

Bloink: Higher income taxpayers are eligible to receive Social Security benefits just like anyone else — and that’s true despite the fact that these taxpayers don’t necessarily rely on these benefits for much of their retirement income.

They’re also likely to receive higher benefits based on higher earnings — and are also able to manipulate their taxable income to avoid paying their fair share.

We need to take steps to ensure that these taxpayers are subject to fair taxation just like lower-earning families who don’t have the ability to manipulate their income given that they need that income to cover their daily living expenses.

Byrnes: Higher income taxpayers are limited in the amount of Social Security they can collect in the same manner as lower-to-middle-income taxpayers. That’s why we have our current system in place, which bases benefits on an individual’s own taxable earnings base over the years.

This is just one more ploy by the Democrats to try to unfairly tax people to fund a socialist agenda — and it’ll never pass in our current political environment.

Bloink: Taxpayers with the highest income levels are those who are also able to reap the most sizeable capital gains. Similarly, they’re the taxpayers who also have the opportunity to take actions and use tax loopholes that allow them to minimize their ordinary income — because they aren’t as reliant on that income to cover basic living expenses.

In the end, these taxpayers often pay less than their fair share. For that reason, it makes perfect sense that those capital gains should also be subject to Social Security taxes.

Byrnes: The Social Security tax isn’t a general revenue tax. This tax is directly tied to a taxpayer’s eventual receipts from the system and is based on earnings during working years. It makes no sense to require higher income taxpayers to pay more without a correspondingly higher benefit.

Bloink: This proposal is a fair middle ground that avoids eliminating the preferential capital gains rate entirely. Some proposals have discussed taxing capital gains at ordinary income tax rates for the wealthiest taxpayers.

This would imply adding the payroll tax rate to the existing lower long-term capital gains rates, which for many, could result in a rate that does not reach the highest income tax rate given wealthy taxpayers’ ability to manipulate their taxable income base through the use of capital gains.

Byrnes: Social Security taxes are handled separately from other types of taxes, including the capital gains taxes. We have a tax structure that taxes different types of income differently for a reason.

We want to encourage taxpayers to maintain their long-term investments to provide stability to help our businesses and economy grow. Raising those taxes by imposing Social Security taxes on them would reduce the benefit given to long-term investments and, in the end, cause more harm than good.

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