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Diane Publishing Books
Taxation of Capital and Labor Through the Self-Employment Tax
Paul Burnham (au)
Since 1950, self-employed individuals have been covered by the Social Security system. In many regards, their obligation to pay Self-Employment Contributions Act (SECA) taxes into the Old-Age, Survivors, and Disability Insurance (OASDI) and Hospital Insurance (HI) trust funds and their entitlement to Social Security and Medicare benefits parallel those of workers who are not self-employed and who thus are covered under the Federal Insurance Contributions Act (FICA). In both cases, the OASDI tax base is limited to income below a certain threshold, and the HI tax base is not constrained by any income ceiling. The two systems, however, diverge in an important way. The FICA tax is based solely on income from labor äóî that is, wages. The SECA tax, in contrast, is based on net business income, which includes compensation for the owneräó»s labor, but can also include income from capital äóî that is, the businessäó» profits. (For people who are not self-employed, capital income includes interest, dividends, rents, and capital gains.) Moreover, the SECA tax base ends up excluding more than half of the labor income of self-employed people. Such differences in tax treatment among businesses providing the same goods and services may prompt people to make choices that they would not otherwise make about self-employment or the organizational form of a business, thereby reducing the efficient allocation of resources. This report decomposes the SECA tax base into its labor and capital components and analyzes three approaches that would modify the SECA tax base. Figures and tables. This is a print on demand report.
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