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Gary M. Galles - Contributor

Mr. Galles is a professor of economics at Pepperdine University. [go to Galles index]


Roll Back The Nanny Tax
Understanding the Constitution…
[Gary M. Galles] 12/15/04

The so-called nanny tax--employer Social Security taxes for domestic help--has apparently claimed another victim. Much as it torpedoed several Clinton nominees and Bush's earlier nomination of Linda Chavez as Secretary of Labor, the law that has created almost as many violators than the speed limit has now helped derail Bernard Kerik's nomination as Secretary of Homeland Security.

As in previous episodes, media accounts are focusing on the politics of the issue, but are ignoring an important issue for part-time household workers. The nanny tax, although it is promoted as benefiting domestic employees, actually harms them. If Americans really wanted to help such workers out, we would roll back the nanny tax, rather than using it to attack executive branch nominees.

How does it help domestic workers who now earn anything more than $1400 in a year from an employer when both they and their employers are required to pay Social Security taxes, leaving both with less in their pockets? The standard reply is that those taxes are necessary, or many workers could not establish eligibility for Social Security benefits when they retire (e.g., The Social Security web site states: "if you do not report the wages for your employee, he or she may not have enough credits to get Social Security benefits, or the amount of benefit will be less.").

However, both the way Social Security benefits are calculated and the Supplemental Security Income program guarantee that few workers would qualify for additional retirement benefits by paying Social Security taxes on as little as $1400 of annual earnings.

Social Security benefits are calculated on the basis of a worker's highest 35 years of inflation-adjusted taxable earnings. A year with little over $1400 in earnings will make it into few people's "top 35." Therefore, the added taxes paid on that income adds absolutely nothing to most workers' eventual Social Security benefits. Those taxes, and the red tape they entail (some have reported that jumping through the nanny tax "hoops" cab add as much as half to the cost of hiring domestic help) collect money for the Social Security system, but do nothing for workers they supposedly help.

For those who would otherwise work too few years in covered and taxed employment to qualify for Social Security retirement benefits (40 quarters), the "tax them to make them eligible" argument also fails. The reason is the Supplemental Security Income program, begun in the early 1970s.

SSI is a welfare program for the elderly poor with few assets, which provides a guaranteed income at roughly the poverty level for a married couple. Virtually everyone whose nanny tax years would be necessary to qualify for Social Security benefits would receive larger benefits from SSI than from Social Security. And since SSI recipients lose a dollar of those benefits for every dollar of Social Security benefits they receive, those nanny tax "contributions" add nothing to their future benefits.

If household employees are actually harmed by the nanny tax rules, why was such a low dollar threshold for imposing the tax selected? One reason is that nanny tax "contributions" are free money to the Social Security system. Unlike "top 35" year contributions, which add to later benefits, these add to the system's revenues, while adding virtually nothing to benefits that will be paid out to affected workers. As a result, while the nanny tax can be marketed for public consumption as helping those affected, it actually transfers income away from those paying it to others.

The nanny tax as currently conceived has been promoted as compassionate, helping affected low income domestic workers achieve Social Security eligibility. But it actually hurts them. So once critics are done using the nanny tax to attack the Bush administration for the Kerik nomination, perhaps they should turn their attention to seeing how it can be stopped from hurting the low-income workers it is alleged to help. tOR

copyright 2004 Gary M. Galles




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