[Excerpt] 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, but the SECA tax is based on net business income, which can also include income from capital. Such a difference in the tax code (say, among businesses providing the same goods and services) can 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. For this analysis, the Congressional Budget Office (CBO) decomposed the SECA tax bases for HI and OASDI into their labor and capital components, but the discussion focuses on the HI tax base because it is unconstrained by the income ceiling of the OASDI tax. CBO estimates that approximately 40 percent of the SECA-HI tax base (the amount of self-employment income subject to the HI tax) derives from capital, and the remainder derives from labor. Furthermore, more than half of the labor income of self-employed people—that is, the portion of their business income that would be subject to the FICA-HI tax if the business was incorporated instead of being a sole proprietorship or a partnership—is not included in the SECA-HI tax base. That occurs because when net income from all of a taxpayer’s businesses is less than the labor income from those businesses, the excess labor income is excluded from the SECA tax base. There is no similar exclusion from the FICA tax base. With both the taxed capital income and the excluded labor income accounted for, the total SECA-HI tax base is roughly three-quarters of the amount of income that would be taxable under the FICA-HI rules. Lawmakers could change the SECA tax base to try to align it more closely with the rules governing the FICA tax base. CBO analyzed three options for alignment that would modify the SECA tax base by either reducing the share of capital income or increasing the share of labor income included in that base. No option by itself would accomplish both of those objectives when applied to both sole proprietorships and partnerships, but one option would do so if applied only to partnerships. Two of the options would reduce the size of the SECA tax base—in one case by more than half—whereas the third option would increase the SECA tax base by a little.