Getty Images Social Security Sen. Bernie Moreno (R-Ohio) has joined Sen. Elizabeth Warren (D-Mass.) in proposing to eliminate the Social Security payroll tax cap. This would impose the 12.4 percent tax on all wages and self-employment income, on top of the graduated income tax.
Today, the Social Security payroll tax applies only to the first $185,000 or so in earned income, so this would be a substantial marginal tax-rate increase for millions of American families and incorporated firms.
Moreno’s proposal would represent one of the largest tax increases on work ever embraced by a Republican. It is also a much larger Social Security tax hike than those proposed by President Biden, Vice President Kamala Harris, or even avowed socialist Sen. Bernie Sanders (I-Vt.).
Moreno has said his plan is about treating all workers the same, with the same tax rate on all of their earnings. But he ignores that we already have the most progressive income tax system in the developed world, with rates ranging between 10 and 37 percent. About half of American households at the bottom of the income scale pay no income tax at all. To pretend that the payroll tax is the end of the story is therefore shoddy tax analysis.
According to the Tax Foundation, eliminating the Social Security payroll taxable earned income cap would raise approximately $3.2 trillion over the next decade under conventional scoring. After accounting for lower economic growth and changes in taxpayer behavior, projected revenue falls to roughly $1.5 trillion. More than half of the projected revenue disappears because the tax increase itself discourages work, investment, entrepreneurship, and economic growth.
Moreno’s plan isn’t responsive to the real issue with Social Security, which has a spending problem and not a taxing problem. The Social Security Trustees measure the program’s finances as percentages of taxable payroll. Dedicated income has remained relatively stable but scheduled benefit costs have continued to rise. The financing gap exists because benefits have grown faster than the taxes dedicated to paying them.
Moreno’s home state of Ohio has spent years reducing taxes to reward work, encourage entrepreneurship, and attract investment. Beginning this year, it imposes a flat individual income tax rate of 2.75 percent. But under the Moreno-Warren proposal, an Ohio entrepreneur operating a pass-through business could face a combined marginal tax rate approaching 56 percent. In other words, more than half of the next dollar earned would go to the government.
Maybe that’s why Sen. John Husted (R-Ohio), who is running for election this year in Ohio, opposes the Warren-Moreno tax hike. He is not alone. Americans for Tax Reform has compiled a lengthy list of prominent Republicans and conservatives who oppose the proposal.
The Social Security payroll tax is among the most economically damaging taxes because it falls directly on work — something we should be encouraging, not discouraging. Many small-business owners effectively pay both the employer and employee shares through their businesses. Eliminating the wage cap would substantially increase the tax burden on the entrepreneurs who hire workers, expand businesses, and create jobs. That principle should not disappear simply because the tax increase is labeled a populist Social Security reform.
Conservatives do not have to choose between tax increases and insolvency. Social Security can be strengthened through gradual benefit reforms that leave the overwhelming majority of retirees unaffected.
The not-at-all conservative Committee for a Responsible Federal Budget has proposed a more sensible alternative. Its Six Figure Limit plan would cap annual Social Security retirement benefits at $100,000 for couples filing at full retirement age, with adjustments for marital status and retirement year. According to the committee, the proposal would strengthen Social Security’s finances while leaving the overwhelming majority of beneficiaries unaffected. Social Security was created to prevent poverty in old age, not to provide six-figure annual government benefits.
The contrast between the two approaches could not be clearer. Moreno would ask workers, entrepreneurs, and small businesses to finance larger government promises through higher taxes. The Six Figure Limit would first limit the largest benefits for seniors who have earned high incomes all their lives and likely have substantial retirement savings.
Conservatives should begin with common-sense spending restraint before asking taxpayers for another dollar.
The question is especially important for younger Americans. A young family raising children already faces rising housing costs, child-care expenses, and the burden of financing a rapidly growing national debt. That family should not pay higher payroll taxes so the federal government can continue sending six-figure annual Social Security checks to the most affluent retirees.
Conservative populism should defend working families against higher taxes. It should reward work, encourage entrepreneurship, and protect the next generation instead of preserving unlimited benefits for the wealthiest retirees.
Republicans can strengthen Social Security without abandoning conservative tax principles. Reform the spending that created the financing gap. Protect the workers who finance the program. Limit six-figure Social Security benefits before raising taxes on a single American.
Ryan Ellis is the President of the Center for a Free Economy and is an IRS Enrolled Agent.
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