Professionals such as doctors and lawyers who are self-employed pay a Social Security payroll tax rate of 12.4 percent on the first $118,500 of income or $14,694 in Social Security tax. If one of them earned more than $118,500, the tax on the additional income would be zero. Recently, there have been proposals to help solve the long-term funding problem in Social Security by charging the tax on all earned income. As an example, suppose a lawyer made $1,000,000 per year. Currently, she would pay a maximum amount of $14,694 in Social Security tax. Under the proposal to subject all earned income to Social Security tax, she would pay much more in tax.

To avoid paying a higher tax bill, the lawyer could establish an “S corporation” and work for it as an employee. She could pay herself a salary of $118,500 and limit her Social Security tax to $14,694. The rest of her annual income would be reported in the form of corporate profits. Based on current tax laws, she would have to pay income tax on her salary and the corporate profit, but the corporate profit is not subject to Social Security tax.

When estimating the actual increase in the Social Security tax actually collected, does it matter whether static or dynamic tax analysis is used?