tax for income tax purposes. The deduction is designed to reflect the fact that one-half the SECA tax represents the employer's share of the payroll tax (which is deductible to the employer).

HISTORY OF PAYROLL TAX RATES AND EARNINGS BASE

Employer/Employee Payroll Taxes: The earnings base has increased numerous times since 1937. Before 1975, all of these increases were provided through specific legislative amendments. The earnings base is currently automatically adjusted annually according to the increase in average wages in the economy. However, this adjustment takes place only if a cost-of-living benefit increase becomes effective for the previous December. The Omnibus Budget Reconciliation Act of 1989 modified the formula under which the annual increase in the earnings base is calculated. As a result of this modification, the earnings base in 1990 (and years thereafter) results from an automatic increase based on calculations of an increase in average earnings which include certain types of deferred compensation, such as contributions to a 401(k) plan. The OBRA of 1990 established for the first time a separate earnings base for the HI program.

Payroll tax rates have been changed many times since 1937. Under the original act, the OASI tax rate was scheduled to increase gradually from 1 percent in 1937 to 3 percent in 1949. These increases were delayed several times during the 1940's and the tax rate did not increase to 1.5 percent until 1950. The current OASI tax rate is 5.60 percent. The tax for the disability insurance program was 0.25 percent in 1957 and is currently 0.60 percent. The hospital insurance (Medicare part A) rate was 0.35 percent in 1966 and is currently 1.45 percent. (For 1984 only, employees were allowed a credit of 0.3 percent of taxable wages against their FICA tax liability, reducing their effective tax rate to 6.7 percent.)

Table 3 shows a history of the earnings base and the payroll tax rate (for employers and employees) since 1937. Table 4 shows a history of the maximum employee contribution (that is, the payroll tax rate multiplied by the earnings base) since 1937.

Self-Employment Taxes: Beginning in 1984, the OASDHI rate for self-employed persons was made equal to the combined employeremployee OASDHI rate. For 1984, self-employed persons were allowed a credit (comparable to the credit allowed employers against the FICA tax) against SECA tax equal to 2.7 percent of net selfemployment income. For 1985, the amount of the credit was 2.3 percent. For 1986 through 1989, the credit was 2.0 percent. The SECA tax credit could directly be taken into account in computing SECA liability for taxable year and estimated tax payments for that year.

Effective in 1990 and thereafter, the credit is replaced with a system designed to achieve parity between employees and the selfemployed. Under this system, the self-employed are allowed to deduct 7.65 percent from their net earnings before computing their Social Security tax and also are able to deduct half of their Social Security tax for income tax purposes.

Table 5 shows a history of rates and earnings base of the selfemployment tax. Table 6 shows a history of the maximum self-employment tax liability.

SOCIAL SECURITY COVERAGE: TYPES OF WORK SUBJECT TO OASDHI PAYROLL TAX

The original Social Security Act provided coverage on a mandatory basis under the old-age insurance program of all employees in commerce and industry (except railroad) who are under age 65. Specifically excluded from coverage "due to difficulties in collecting the tax" were the following services: agricultural labor; domestic services in a private home; casual labor not in the course of the employer's trade or business; and services performed by an officer or member of a crew on a documented vessel. Also specifically excluded were services performed in the employ of: the United States Government, a State or any political subdivision of a State; and nonprofit (including religious) organizations.

Coverage has been extended both on a mandatory and a voluntary basis. Mandatory coverage was extended to workers age 65 and over not otherwise excluded in 1939. In 1950 most non-farm self-employed, regularly employed farm and domestic workers, and Federal civilian employees not under a retirement system were covered on a mandatory basis. In addition, the 1950 amendments provided elective coverage to State and local government employees not under a retirement system and employees of nonprofit organizations.

The most significant extensions of coverage provided by the 1954 amendments were to self-employed farmers on a mandatory basis and, on an elective basis, State and local government employees (except firemen and policemen) under retirement systems and ministers. Coverage was extended to members of the uniformed services in 1956. Čoverage was extended to professional self-employed persons in 1954, 1956, and 1965. In 1983, coverage was extended on a compulsory basis to the following major groups: Federal employees hired after December 31, 1983; current and future members of Congress; the President and Vice President; Federal judges; and all employees of nonprofit organizations. Also, terminations of Social Security coverage for employees of State and local governments were no longer allowed. Effective July 2, 1991, State and local government employees not under a retirement system are covered mandatorily under OASDHI.

Effective in 1983, Federal civilians were covered under the hospital insurance portion of the Medicare program. Medicare coverage also was extended on a mandatory basis to State and local government employees hired after March 31, 1986. States were permitted to extend Medicare coverage (without extending coverage under Social Security cash benefits) to employees hired prior to April 1986 by voluntary agreement with the Secretary of the Department of Health and Human Services (HHS).

The increase in Social Security coverage since the program's beginning has been significant. In 1939, civilian employment covered by the Social Security system included 24 million employees, or 55.1 percent of the labor force. In 1991, covered employment accounted for 110.6 million employees, or 95.2 percent of the labor force (see table 7). Earnings subject to the payroll tax have grown from $69.1 billion in 1946 to $2.43 trillion in 1991 (table 8).

While coverage is compulsory for most employment, some workers are not covered at present. These include Federal civilian employees hired before January 1, 1984, State and local government employees covered under a retirement system for whom coverage has not been elected, and certain workers exempted on religious grounds. (See table 9 for numbers and percentages of various types of workers covered under OASDI and table 10 for numbers and percentages of State and local government employees covered under OASDHI by State.)

TAXATION OF SOCIAL SECURITY (OASDI) BENEFITS FOR HIGHER

INCOME PERSONS

Taxpayers whose incomes exceed certain base amounts must include in taxable income up to one-half of their OASDI (and tier 1 railroad retirement) benefits. The base amounts are $32,000 for a married couple filing jointly, $0 for a married couple filing separately, and $25,000 for all other filing categories. Income for this purpose is the sum of (1) the taxpayer's adjusted gross income before OASDI benefits are considered, (2) the taxpayer's tax-free interest income, and (3) one-half of the taxpayer's OASDI benefits for the year.

If the sum of this income exceeds the base amount for the taxpayer's filing category, the taxpayer must include in taxable income one-half of the excess, up to one-half of the taxpayer's OASDI benefits for the year. The following table contains several examples that illustrate the taxation of OASDI benefits.

The proceeds from the taxation of Social Security benefits are

credited to the OASDI trust funds.

For calendar year 1993, it is estimated that 22 percent1 of Social Security beneficiaries will be affected by the taxation of benefits provisions.

TABLE 1. OASDHI PAYROLL TAX (1993): CONTRIBUTION RATE (EMPLOYER AND EMPLOYEE), MAXIMUM TAXABLE EARNINGS, AND MAXIMUM EMPLOYEE CONTRIBUTION

Source: 1992 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds

TABLE 2. SELF-EMPLOYED OASDHI TAX (1993): CONTRIBUTION RATE, MAXIMUM TAXABLE EARNINGS, AND MAXIMUM CONTRIBUTION

Source: 1992 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds

1This figure is taken from the 1993 Green Book, Committee on Ways and Means, “Overview

of Entitlement Programs," Section 1, table 13.