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In the ongoing search for money to pay for health reform, Senate Majority Leader Harry Reid (D-Nev.) reportedly wants to raise the Medicare payroll tax rate for high earners. It is not the best way to generate revenue, but it is not the worst either.
Today, Medicare collects a 1.45 percent tax on wages (plus an equal amount from employers). Unlike Social Security, there is no cap on wages subject to the Medicare tax. One idea floating around: Raise about $50 billion over 10 years by hiking the Medicare rate by 0.5 percent for those making more than $250,000. You’ll recall that President Obama has foolishly exempted income below a quarter of a million dollars from any tax increases.
On paper some of this money may be allocated to the Medicare Trust Fund (due to be exhausted by 2017, according to the most recent trustees’ report). But with general fund money and payroll tax funds flying between Medicare and the rest of the budget at warp speed, this is mostly an accounting fiction. In truth, raising the payroll tax rate is little more than a backdoor tax hike on the very wealthy.
The idea of making payroll taxes progressive is interesting, to say the least. Today, the highest earning 20 percent pay a lower average payroll tax rate (6.9 percent) than those in the bottom 20 percent (7.3 percent). In recent years, Congress has raised Medicare premiums for high-earning seniors. Now, Reid may try to raise Medicare taxes for high-earning workers.
And he might do even more. For years Democrats have toyed with the idea of imposing the payroll tax on income other than wages--capital gains and dividends, for example. Among other things, this would make it harder for high-earners to avoid the tax hike by changing the way they are compensated. But besides rendering the label “payroll tax” meaningless, this would be a big step towards making social insurance taxes indistinguishable from income taxes.
For years, the idea of hiking payroll taxes has been resisted by many on the left, who fear this step would break the social compact that has protected Medicare and Social Security from the pressures faced by means-tested entitlements. The more Medicare looks like welfare, the more jeopardy it will be in, goes this reasoning.
Now, however, in an effort to save the tax exclusion for employer-sponsored health insurance, unions seem enthusiastic about taxing wages of the rich. They may have noticed in the current health debate that few politicians are willing to risk their skins going after Medicare.
Of course, raising the payroll tax rate today to finance health insurance subsidies for working-age people will make it tougher to raise their tax later for other purposes (such as trimmin the deficit). But that, Reid probably figures, will be someone else’s problem.
The House health bill would pay for reform with a 5.4 percent income tax surcharge on individuals earning more than $500,000. Reid may try to get the cash by raising payroll taxes for many of the same people. No matter how Democrats structure this, they seem intent on making a small number of people pay the cost of health reform. I still think that’s a bad idea.
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