Death, taxes, and struggling to pass bills in Congress. These are life's three new givens.
Following the failure of the Republicans' repeal-and-replace effort of the Affordable Care Act (ACA), President Trump asked his congressional peers to focus on the cornerstone of his campaign promises: tax reform.
Trump's call for tax reform hits a snag
For those who may not recall, Trump touted the idea of tax-cutting and simplification during his campaign. For individuals, he adopted the House Republicans' suggestion of a progressive three-bracket federal income tax system (12%, 25%, and 33%) and called for a simplification of the tax code that would eliminate most deductions and credits and replace them with a larger standard deduction.
On the corporate side of the equation, Trump opined that he would push for corporate tax rates of 15%, down from the current peak rate of 35%, as well as establish a special holiday repatriation rate of 10% to encourage U.S. multinationals with an aggregate of $2.5 trillion in overseas capital to bring this cash back home.
Of course, it's not uncommon for what candidates tout on the campaign trail and what gets passed once in office to differ a bit. After all, Congress is made up of 535 representatives, and appealing to a majority often requires some compromise.
Yet even with Republicans maintaining a majority in both houses of Congress, they've been dealt a tough path to tax reform following the failure of the ACA repeal. That repeal was expected to save $300 billion or more over the next decade, which would have given GOP lawmakers added reform flexibility. Without the ACA remaining in place, the tax reform timetable got a whole lot murkier.
The Republicans suggested... eliminating the payroll tax?
President Trump and his Republican colleagues are in a precarious position at the moment. They need to find ways to trim costs, yet not at the expensive of expanding the federal deficit. One idea being floated around Washington by a GOP lobbyist, according to Fox News, is one that would see the payroll tax drastically cut or eliminated entirely.
In 2015, Social Security generated $920.2 billion in revenue, and the payroll tax accounted for 86.4% of that revenue. The payroll tax, which also funds Medicare, is a 15.3% aggregate tax on earned income. Overall, 12.4% goes to fund Social Security, and 2.9% funds Medicare. However, most workers are only responsible for half of this amount, with their employers covering the remainder. Thus, your responsibility as a worker is often 7.65% of your earned income (6.2% to Social Security and 1.45% to Medicare). Only the self-employed wind up paying the full 15.3%.
Even then, Social Security's payroll tax has added exemptions. Earned income is taxed between $0.01 and $127,200, as of 2017. Any additional income above and beyond $127,200 is free and clear of taxation, which is a big benefit to the wealthy.
Under the Republican proposal, the payroll tax for Social Security (the aforementioned 12.4% tax) would be eliminated, while the Medicare tax of 2.9% would remain in place.
Why eliminate this absolutely critical source of funding? Removing the Social Security payroll tax would add $3,100 to the pockets of the average Americans household earning $50,000 a year. Republican lawmakers have long believed that putting money back into the pockets of Americans is the best way to stimulate our consumption-driven economy.
Also keep in mind that if Republicans eliminate the primary source of Social Security's funding, they'll need to find a new standard of revenue generation for the program. One option would transform the border adjustment tax proposed by Rep. Kevin Brady (R-Texas) into something of a value-added tax on consumption that would be expected to generate $12 trillion over the next decade.
Possibly the worst Social Security idea ever
Even if the idea of eliminating Social Security's payroll tax is just an option that's being floated around and that the White House isn't taking seriously at this point, it might arguably be the worst Social Security idea ever presented -- and I don't say that lightly.
According to data from the Social Security Administration, 61% of retired workers (and there were more than 41 million of them receiving monthly benefits, as of February 2017) count on their Social Security benefits to comprise at least half of their monthly income. This figure is even higher (71%) for unmarried elderly individuals. Long story short, Social Security is crucial to ensuring that millions of older workers can make ends meet during retirement.
The GOP idea being floated to eliminate the payroll tax would remove a steady source of funding for Social Security and replace it with a revenue-based source of funding. This change would, in effect, make the Social Security program reliant on consumption to drive future benefit payments, meaning the program could be significantly affected by recessions.
But there's an even greater danger. By moving from a payroll tax to what would be construed as general revenue through a value-added tax, the government would have the liberty of increasing or decreasing what's apportioned to Social Security each year with much more ease than adjusting the payroll tax on wages.
Also remember, Trump's budget director, Mick Mulvaney, the man who'll oversee that the president's "I's" are dotted and "T's" are crossed with his budget, has argued in favor of making tough spending cuts, even when it comes to the Social Security program.
If there is a bright side, this is merely an option being floated around and not a concrete bill at this point. It would, in my belief, find zero support among the Democratic Party, and it would struggle to find support among some Republicans, making its outlook pretty glum. That doesn't change the fact that Social Security needs a fix for future generations, but this solution is clearly not the answer.
The $16,122 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.