Expand the Payroll Tax Cap to Cover 90 Percent of Wages

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. In 2023, 83 percent of wages and salaries were subject to the payroll tax, but the share has generally been declining since the 1983 Social Security Amendments, the last major reform to Social Security that addressed short-term insolvency concerns.

This option increases the payroll tax cap to cover 90 percent of wages, setting the cap at $346,000 beginning in 2027 and indexing it for wage growth moving forward. This option does not change the calculation for Social Security benefits. Expanding the Social Security payroll tax and self-employment tax to cover a greater amount of labor income would reduce incentives to work, shrinking hours worked and long-run economic output.

On a conventional basis, this option would decrease the primary deficit by $1,295.3 billion over the budget window. Long-run GDP and long-run GNP would fall by 0.7 percent. On a dynamic basis, the primary deficit would decrease by $482.2 billion from 2027 through 2036, $813.1 billion less than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be lower than baseline, reaching 173.7 percent by 2056.

On average, in 2036, taxpayers would see decreases in their after-tax incomes of 0.6 percent. The top quintile of taxpayers would experience a 0.9 percent decrease, whereas the bottom quintile would experience no change. On a long-run dynamic basis, taxpayers would see a 1.1 percent decrease on average.