Fair Tax

In the aftermath of the vote on the payroll tax cut, Tea Party talking heads filled the airwaves claiming that they were “holding out” for a twelve month extension and only opposed to a two month extension because of the uncertainty is would create. They also were unanimous in voicing the “need to protect” Social Security. (Somehow, they forgot that the Tea Party had as its goal putting an end to entitlements “that were bankrupting the government”.) Those claims not withstanding, here are suggestions to save Social Security as well as reduce the deficit:

•  First, all income, regardless of form, received as compensation should be classified as wages, salaries, and tips and reported as such on Form W2. Executive compensation in the form of stock options or S corporation profits passed on as dividends are income and should also be considered the same as wages, salary, and tips. Dividends and capital gains from employer awarded stock and stock options should also be classifies the same as any other form of salary or wage. 
•  Second, the cap on FICA should be eliminated on the part of the employer and raised to ten million dollars on the part of the employee. 
•  Third, FICA payroll tax should be eliminated on the first ten thousand dollars of compensation on the part of the employee and employer. 
•  Fourth, FICA payroll tax should be waived on the part of the employer up to a maximum of $50,000 of payroll for the employee’s first year of employment, but should be payable or reimbursed by the employer if the employee is involuntarily discharged during the first five years of employment. If the employee leaves of his or her own accord no reimbursement on the part of the employer would be required, but if the business closes, moves operation off-shore, or terminates employment for any reason other than cause on the part of the employee the waived FICA shall become due and payable.  

These four changes should provide sufficient funds to extend the financial viability of the Social Security program. In addition, additional income taxes that will accrue because of reclassifying executive compensation will help with the deficit. Finally by making all executive compensation subject to all payroll taxes, companies will be encouraged to bring executive compensation back in line with prior relationships to other employee compensation. The greatest economic growth occurred when the highest paid executives compensation was 40 times the lowest paid employees. As the ratio of high to low grew to today’s 400 times the lowest paid employee, layoffs, movement of manufacturing off-shore, unemployment, and other negative economic impacts resulted.