A typical young worker with a wife, a child and a $30,000 annual salary pays federal taxes up to five times as great as those paid by a typical retired elderly couple with $30,000 income, according to computations by the Congressional Joint Committee on Taxation.
This disparity, caused by special tax breaks for the elderly, could become an important policy issue as Congress and the Bush administration seek new sources of revenue to cut the federal budget deficit. In coming years, it could spur attempts to raise up to $100 billion over five years by reducing the biggest tax advantage enjoyed by the elderly -- the exemption of most Social Security benefits from federal income taxes.
Joint Committee calculations show that under current tax law, a young worker, whose 1990 income consists of $30,000 in wages and who has a nonworking wife and one child, would pay $2,760 in federal income taxes if he did not itemize deductions, plus $2,295 in Social Security payroll taxes -- a total of $5,055.
An elderly couple with $30,000 in income -- consisting of Social Security ($12,000), a taxable pension ($12,000) and taxable interest ($6,000) --
would pay $1,073 in income tax.
If the same young worker were earning $50,000, under current law he would pay $6,534 in income tax plus $3,825 in Social Security payroll taxes. If the elderly couple's income were $50,000 (through receiving an added $10,000 in interest and $10,000 in wages), the couple would pay $5,064 in income taxes plus $765 in Social Security taxes, according to the committee's figures.
These calculations for hypothetical families, included in the House Ways and Means Committee "Green Book" of program statistics, have been looked at by some lawmakers who believe any deficit-reduction steps must involve Social Security, despite the political risks associated with reducing the income-tax exemption for Social Security benefits. But they acknowledge such a proposal probably would not fly at this time -- an election year.
Under existing law, half of the Social Security benefits received by retirees are automatically excluded from being counted as income subject to federal income tax.
If the income of the taxpayer from all sources (including tax-exempt bond interest and half of his or her Social Security benefits) is less than $25,000 for an individual filer or $32,000 for a couple, all the Social Security benefits are exempt from tax.
As a result, only about 20 percent of the elderly pay income taxes today on any of their Social Security benefits, and the amount collected is estimated at $4.6 billion for 1990.
A second reason why the elderly pay less in income taxes, according to the Green Book, is that persons 65 or over get an extra $650 standard deduction per person if married, or $800 if single -- on top of the basic standard deduction.
In addition, retirees typically get a far lower proportion of their income from wages than do young people, and therefore pay little or no Social Security payroll tax.
One proposal that has been put forward in past budget negotiations is to count half of all Social Security benefits as taxable income, eliminating the total exemption for taxpayers whose income is below the current $25,000/$32,000 tax threshold.
Even under this plan, many elderly would still pay no income tax because their total incomes would be too low. But the Congressional Budget Office estimates the change would raise about $38 billion over five years.
Another proposal would tax 85 percent of all benefits, while eliminating the total exemption for taxpayers whose income is under the current tax threshold. That would raise about $100 billion over five years.
One congressional aide, who asked not to be identified, said that if budget choices involve cutting cost-of-living adjustments (COLAs) or taxing more of the Social Security benefits, the latter is "the lesser of two evils," since it hits the higher-income elderly rather than all the elderly.
Neither idea sits well with the American Association of Retired Persons, said Martin Corry, a lobbyist for the organization. "We don't think there should be any increase in taxation of benefits or any cuts in COLAs."
He said that under the law, the money received by the federal government from the tax on benefits goes into the Social Security trust funds, not into Treasury general revenues. But since the trust funds are building large revenue surpluses, Corry said, pumping more money into them through more taxes on Social Security benefits "could only further mask the deficit" on the non-Social Security side of the budget.
Figures from Corry's office show that the differences in tax burdens by age are not always as great as the Green Book examples would indicate, especially for low-income families with children that receive federal income supplement payments. Even so, the elderly usually pay less on similar total incomes.
Kate Walsh O'Beirne, Heritage Foundation deputy director of domestic policy studies, also responded negatively to the idea of making more Social Security benefits taxable.
"Generally, we don't want to see any taxes raised," she said.
To help cut the overall budget deficit, she said, Heritage prefers cutting farm subsidies, Amtrak subsidies, military commissary and PX subsidies and other such items.