The Invisible Tax
Why the biggest tax most Americans pay is the one they understand least
By Matt Sly
Status: Working draft. This is a companion proposal to the Fair and Simple Tax Act. A detailed specification is available in the Social Security reform PRFAQ. Feedback welcome at me@mattsly.com.
The Problem
Most Americans’ largest tax isn’t income tax. It’s FICA (Social Security + Medicare): 7.65% from every paycheck, matched by another 7.65% from the employer, on wages up to roughly $176,000. A worker earning $60,000 pays $4,590 in FICA before their first dollar of income tax. And unlike income tax, FICA has no 0% bracket, no standard deduction, no progressivity at all. Dollar one is taxed at 7.65%.
Worse, the wage cap means FICA is actually regressive above $176,000. A worker earning $176,000 pays 7.65%. A worker earning $1,000,000 pays an effective FICA rate of about 1.3% (plus the uncapped 1.45% Medicare portion). This is indefensible in a system that claims to be progressive.
The Proposal
- Eliminate employee-side FICA entirely. This is an immediate ~8% raise for every worker in America.
- Retain the employer side as an “Employer Safety Net Contribution” (ESNC) at 8%, uncapped. Removing the wage cap means high earners contribute proportionally.
- Self-employed individuals pay 8% flat (down from 15.3%).
- Social Security and Medicare funded through ESNC plus general revenue.
The combined effect: a worker earning $60,000 keeps an extra $4,590 per year. Their W-2 collapses from roughly 20 fields to about 4. And Social Security’s funding base broadens dramatically, extending solvency without cutting benefits.
Key Design Decisions
- Why employer-side only? Eliminates the most visible and regressive tax for workers. Employers already bear the cost implicitly (economic incidence of employer-side payroll tax falls partly on wages), but the psychological and administrative simplification for workers is enormous.
- Why uncap it? The wage cap is a political artifact of Social Security’s original design as “social insurance” (benefits tied to contributions). Uncapping the employer contribution breaks this link, but the link was already largely symbolic for high earners.
- Why 8%? Balances revenue needs with the goal of reducing the self-employment tax burden (currently 15.3%) to a level that doesn’t penalize entrepreneurship.
Open Questions
- Social Security benefit formula. Currently, benefits are tied to contributions through the AIME/PIA formula. Uncapping contributions without uncapping benefits changes the social contract. Needs explicit treatment.
- Transition for existing workers near retirement. Workers who have paid into the system under current rules need assurance their expected benefits are protected.
- General revenue dependency. Shifting Social Security funding partly to general revenue changes its political dynamics (dedicated funding has historically protected it from budget cuts). Needs careful framing.
Revenue Impact
- Revenue gained from uncapping employer contributions: significant (depends on wage distribution modeling).
- Revenue lost from eliminating employee-side FICA: roughly $600-700 billion per year.
- Net position requires detailed scoring. The PRFAQ specification includes preliminary estimates.
Relationship to Other Proposals
- Income tax reform: The combined effective rate (income tax + FICA) is what workers actually feel. Eliminating employee FICA fundamentally changes the take-home pay calculation and interacts with the 0% bracket.
- Child payment: FICA elimination provides an immediate raise that complements the monthly child payment for working families.
- Lifetime Gains Framework: Independent. Capital gains are not subject to FICA under current law or this proposal.
This proposal is part of the Fair and Simple Tax Act. A detailed specification is available in the Social Security reform PRFAQ. All policy positions are the author’s own.