Social Security Tax on Capital Gains

The Biden administration has proposed many different ideas for taxing the wealthy in order to increase tax revenues in the U.S. Some of those proposals would apply the Social Security tax to capital gains of high-income taxpayers. The proposals come in various shapes and sizes. One would simply add the existing Social Security tax rate to the capital gains rate paid by the highest earners. Another would raise the long-term capital gains tax rate to match the ordinary income tax rate, and use the excess to shore up the Social Security system.

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 capital gains for high earning taxpayers.

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

Their Votes:

Bloink

Byrnes

Their Reasons:

Bloink: Higher income taxpayers receive Social Security benefits just like all other Americans. That’s true even though most high-income taxpayers are not dependent on these benefits for much of their retirement income and would be financially secure even if the Social Security system failed. High earners will also receive higher benefits based on higher lifetime earnings during working years. It makes absolute sense that we should modify the system so that these taxpayers are paying more into it to give us a viable way to shore up the Social Security program across-the-board.

Byrnes: Higher income taxpayers are limited in the amount of Social Security benefits they are able to collect just like lower-and-middle-income Americans. That's why we have the current system in place. Currently, Social Security benefits are based on the taxpayer’s personal taxable earnings base that has been built up over their working years. The system is fair and doesn’t differentiate between low and high income taxpayers since everyone receives their proportionate benefits.

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Bloink: High-income taxpayers are also able to manipulate their taxable income to avoid paying their fair share. Since many high-income taxpayers have the ability to receive sizeable capital gains and minimize their taxable ordinary income, it makes sense that those capital gains should also be subject to Social Security taxes that are used to fund the system as a whole. When the Social Security system is solid, everyone wins, and we must find a way to ensure the wealthiest Americans are paying their fair share.

Byrnes: This proposal is merely one more ploy by the Democrats to try to unfairly tax successful Americans to fund a Socialist agenda. The Social Security tax is not a general revenue tax. Instead, it’s directly tied to 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 corresponding higher Social Security benefit.

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Bloink: Unrealized gains account for a huge portion of high-income taxpayers’ wealth. On the other hand, ordinary (taxable) income makes up the vast majority of the ordinary American’s wealth. While the wealthiest Americans are seeing a very small portion of their wealth taxed for Social Security purposes, most Americans are taxed on every dollar that they earn. That’s simply not fair. We need to correct this system so that wealthy Americans are paying taxes on a larger portion of their wealth—including income generated from capital gains that are taxed at a much lower rate to begin with.

Byrnes: Capital gains and Social Security have nothing to do with one another. The lower capital gains tax rates are in place for a very good reason: to motivate taxpayers to engage in longer-term investment strategies to help this economy grow and prosper. Raising the long-term capital gains rate by adding a Social Security tax component would only serve to minimize that motivation in our already-fragile economic climate.