Apply the Payroll Tax to Earnings Above $400,000

The Social Security payroll tax and self-employment tax apply to an individual’s first $184,500 of wages in 2026 (the threshold is inflation-adjusted annually) at a rate of 12.4 percent, split between employees and employers. The same wage threshold applies when calculating Social Security benefits, capping how much high-income retirees receive in line with the cap on the taxes they paid.

This option expands the Social Security payroll tax and self-employment tax to apply to all labor income above $400,000, but not to any labor income in between the current threshold and $400,000, creating a so-called “donut hole.” Over time, because of inflation adjustments to the current wage base, the donut hole would close, and all labor income would be subject to the tax. This option does not change the calculation for Social Security benefits. By increasing marginal tax rates on labor income, this option would discourage work among high-income individuals, reducing long-run economic output.

On a conventional basis, this option would decrease the primary deficit by $1,476.5 billion over the budget window. Long-run GDP would fall by 0.7 percent, and long-run GNP by 0.5 percent. On a dynamic basis, the primary deficit would decrease by $819.6 billion from 2027 through 2036, $656.9 billion less than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be lower than baseline, reaching 170.1 percent by 2056.

On average, in 2036, taxpayers would see decreases in their after-tax incomes of 0.8 percent. The top quintile of taxpayers would experience a 1.3 percent decrease, whereas the bottom quintile would experience no change. On a long-run dynamic basis, taxpayers would see a 1.3 percent decrease on average.