Higher Taxes Won’t Save Social Security

Social Security is currently funded through payroll taxes paid by both the employer and employee at 6.2% each for the first $162,000 earned. The employee portion is taken directly from monthly paychecks. These payroll taxes account for most of the taxes that Americans pay, with almost 70% of taxpayers paying more in payroll taxes than they do in federal income taxes.

Despite their large welfare states, European countries cap payroll taxes at much lower incomes than the U.S. does. Germany caps payroll taxes for health insurance at about $62,000 and the Netherlands caps theirs for social security at $40,370. Uncapping the payroll tax in the U.S. would only widen the disparity and make America a less attractive country in which to work and invest.

But the bigger problem is what it will do to the American economy. Uncapping the payroll tax is anti-worker in all regards. It will directly reduce people’s take-home pay, decreasing the incentive to work and pushing some of the most innovative workers out of the economy.

Uncapping the payroll tax would raise the top tax rate on Americans’ labor income—income and employee payroll tax combined—to as high as 43.2%. This excludes state taxes and the employer payroll tax, which make the rate even higher.

The U.S. hasn’t seen labor tax rates that high since before

Ronald Reagan.

For all this, the proposal wouldn’t even fix the structural issues with Social Security. Like a ponzi scheme, the program relies on the contributions of a shrinking young population to pay off an increasing elderly population. Inevitably, as younger workers age there won’t be enough money left in the system. That means that the payments young Americans make to fund their retirement will only benefit the elderly who get to it first.

These programs need serious structural reforms—more tax revenue won’t save them. A study by the liberal Center on Budget and Policy Priorities found that even completely removing the payroll tax cap and taxing all earnings with a combined 15.3% payroll tax wouldn’t cover these programs’ shortfalls over the long run.

Lawmakers need to think bigger to offer real solutions. By raising the retirement age, letting workers put their tax in personal accounts instead of Social Security, and shifting Social Security to a flat benefit to make it a true antipoverty program, lawmakers could begin to address the crisis.

European countries that cap their payroll taxes at relatively low incomes understand that you can’t fund a social-safety net without providing an incentive to work. The U.S. should too.

Mr. Nix is studying tax law at Georgetown University Law Center.