Implement New Payroll Tax Proposal from Rep. Larson

[andersonfrailey]

Connecticut Rep John Larson recently introduced "The Social Security 2100 Act", details for which can be found here. This PR implements the part of the proposal that would introduce a donut hole in payroll tax liability. The proposal specifically states:

Have millionaires and billionaires pay the same rate as everyone else – Presently, payroll taxes are not collected on wages over $132,900. This legislation would apply the payroll tax to wages above $400,000. This provision would only affect the top 0.4% of wage earners. [Sec. 201, 202]

According to the bill text, this would actually apply to both wages and self-employment income:

Sec. 201. Determination of wages and self-employment income above contribution and benefit base after 2019.
Sec. 202. Inclusion of earnings over $400,000 in Social Security benefit formula.

Talking over the implementation with @jdebacker, we determined that this new earnings threshold would not be indexed to inflation so the donut hole will close over time. This also seems to be supported by the bill text:

14 ‘‘except that this subparagraph shall apply only to
15 calendar years for which the contribution and ben-
16 efit base (as so determined) is less than $400,000,

This pull request also includes a JSON reform file that characterizes the payroll and income tax aspects of the Larson proposal.

[codecov]

Codecov Report

Merging #2222 into master will not change coverage.
The diff coverage is n/a.

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  Files          12      12           
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[martinholmer]

@andersonfrailey said in PR #2222:

I put a WIP label on this PR because I might slightly edit how self-employment income is added into the new calculations. It might be the case that only a fraction of self-employment income would be applied to meeting this threshold. I'll have an answer on that this afternoon.

Once you nail that down, why not add a JSON reform file for this payroll tax reform in the taxcalc/reforms directory?

[andersonfrailey]

@martinholmer, latest commit finishes the implementation and adds a JSON file. I'm having some issues creating the corresponding Larson2019.out file though. As you can see there are a lot of blank spaces. I created the file by following along the process of testing reform outputs in test_reform_json_and_output. I'll work on it a bit more and push changes when I get it right.

[martinholmer]

@andersonfrailey, Can you explain in words what this code is doing?

[martinholmer]

@andersonfrailey said:

I'm having some issues creating the corresponding Larson2019.out file though.

Wait to do this after PR #2223 is merged into the master branch and you merge those changes into your larsonproposal branch.

[andersonfrailey]

Wait to do this after PR #2223 is merged into the master branch and you merge those changes into your larsonproposal branch.

Sounds good.

As for what the code is doing:

sey_frac = 1.0 - 0.5 * FICA_ss_trt

First it's finding the portion of self-employment income that is eligible to be taxed. My understanding is that you can reduce your taxable self-employment income by half, so I followed the logic that was used a few lines up. I left out _FICA_mc_trt because the proposal only mentions Social Security payroll taxes.

was_plus_sey_p = txearn_was_p + (sey_p * sey_frac)
was_plus_sey_s = txearn_was_s + (sey_s * sey_frac)

Here we find total wages and self-employment income eligible to be taxed for the primary and secondary tax payer.

additional_ss_income_p = max(0., was_plus_sey_p - SS_Earnings_thd)
additional_ss_income_s = max(0., was_plus_sey_s - SS_Earnings_thd)
additional_payrolltax = (additional_ss_income_p * FICA_ss_trt +
  	                 additional_ss_income_s * FICA_ss_trt)

Finally, we calculate the additional payroll taxes owed for the primary and secondary payer. The default value for SS_Earnings_thd is 9e99 so unless a reform is introduced that lowers the threshold to a more reasonable level, the additional payroll tax will always be zero.

[martinholmer]

@andersonfrailey, Thanks for the explanation. On further review, it seems to me (but I could be wrong) that there are a couple of problems with the proposed code changes:

1. The definition of the two was_plus_sey_? variables doesn't seem correct. Here is what you have now:

    was_plus_sey_p = txearn_was_p + (sey_p * sey_frac)
    was_plus_sey_s = txearn_was_s + (sey_s * sey_frac)

But the txearn_was_? variables are capped at the maximum taxable earnings level, SS_Earings_c. Thats not what the proposal says, does it?

2. Under current law, self-employment losses (negative sey_?) are not allowed to offset positive wage and salary income, but the code fragment in item 1 does allow that. I doubt if that is in Larson's proposal. Look at the existing code to see how current-law policy handles negative self-employment income.

[andersonfrailey]

@martinholmer said:

But the txearn_was_? variables are capped at the maximum taxable earnings level, SS_Earings_c. Thats not what the proposal says, does it?

1. Under current law, self-employment losses (negative sey_?) are not allowed to offset positive wage and salary income, but the code fragment in item 1 does allow that. I doubt if that is in Larson's proposal. Look at the existing code to see how current-law policy handles negative self-employment income.

Ah, good catch on both. You're correct. I'll update them both shortly.

[martinholmer]

@andersonfrailey, PR #2222 look good to me after a quick review. Let's "sleep on it" and if neither of us have any concerns I can merge this tomorrow morning.

[andersonfrailey]

@martinholmer sounds good to me!

[martinholmer]

@andersonfrailey, Thanks for making it possible to simulate the payroll tax side of the Larson reform.

Just wondering how they plan to collect the tax on earnings above $400,000: employer withholding or as part of the income tax. Did you happen to notice that detail when reading the legislative proposal?

[andersonfrailey]

@martinholmer

Just wondering how they plan to collect the tax on earnings above $400,000: employer withholding or as part of the income tax. Did you happen to notice that detail when reading the legislative proposal?

I haven't seen any detail on how they would collect the tax on earnings above $400,000. I would assume employer withholdings, but I have nothing concrete to back that up.