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Contributors
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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