Lately this topic has been hot in Estonia – should there be a cap on social security tax (SS) or not. SS tax rate in Estonia os rather high – 33% of the paycheck. Now there is a proposal to put the cap on so that you would only have to pay SS on the first €4000/mo salary. You’d have to keep paying income and other taxes after that level though. Last year, less than 2000 people earned more than this treshold.
There has been quite a debate on whether this cap should be introduced or maybe there should be even a progressive tax instead. Lot has been said already but I would like to bring out three additional points why this kind of cap is not only good for the overall economy but also fair in other perspective:
1) A part of SS goes to cover the medical costs of the employee. Now, it should be pretty obvious that there is no correlation between salary and tendency to be sick (or if there is, they are probably negatively correlated). Thus the person paying more tax for his health insurance is not likely to get any extra services than somebody with a minimum salary. In fact, the real situation is exactly the opposite. Unless you want to wait for two years for a specific treatment, you’d have to pay for it and do it in the private practice. But that’s a longer story that I will maybe cover here in some point in the future.
2) The admirers of the progressive tax system forget one very important point. There is usually a good reason why somebody earns a higher than average salary. More often than not, this person worked harder at school and spent less time behind the TV screen. She has probably studied for more years and taken a rather significant loan to finance her studies. She is likely to have more responsibility and is working more hours. Do you really think that working hard, taking risks and investing into your knowledge should be punished by a higher tax rate?!
3) I believe that establishing the social security tax cap would increase the inflow of income tax (and other smaller taxes). Not only would it make feasible to bring in world class highly paid specialists to Estonia (who therefore would increase the tax receipts), but it would also make dodging taxes less desirable. I believe that the proposed cap would at least double the amount of people earning more than €4000/mo in a few years.
The issue that bothers me the most about the tax debate is the overall judgement that high income level is something that the person inherited from the God and therefore it is fair to take pieces of it and give them to other people who were not that “lucky”. In reality, the persons earning high salary have more often that not worked their asses off to get there. They have often taken huge loans to finance their education and made big personal sacrifices on the way. They take a lot of responsibility and therefore have a lot of stress in their life. Establishing a social security tax cap would be the first step towards recognition that these people do not need to be punished for working hard.