Obama’s Medicare UnPayroll Tax

President Obama’s proposal to boost the Medicare tax is a key element of the compromise health bill that looks increasingly as if it is going to become law. The Joint Committee on Taxation estimates it would generate over $180 billion over the next decade. And exactly as intended, the tax increase would fall almost entirely on the top 1 percent of taxpayers, according to a new analysis by my Tax Policy Center colleagues.  

Obama would boost the Medicare tax by 0.9 percentage points for households with incomes over $200,000 for singles and $250,000 for joint filers. In addition, he’d impose a 2.9 percent tax on these same people on interest, dividends, annuities, and most other investment income. While the official Obama summary does not say so, the new tax would apply to capital gains as well. Add it up, and the 1.2 million taxpayers making $624,000 or more (their average income is about $2 million) would pay nearly 86 percent of this tax once it is fully effective in 2013.

On average, the Obama proposal would raise their taxes by more than $20,000. The top 0.1 percent of earners--those making more than $2.8 million-- would get hit with a tax increase of more than $120,000. By contrast, nearly everyone else would get no tax hike at all under this proposal.

Oddly, senators who were adamantly opposed to an income tax surtax that the House included in its health reform bill seem perfectly fine with this plan. Since the two levies raise roughly the same money from the same people, I’m not sure why. But sometimes in Washington it is all about framing rather than reality.

Obama probably doesn’t hurt his cause when he says he’d use some of the money to help make Medicare solvent. That’s sounds really good. Unfortunately it is mostly meaningless. The general fund already pays a large share of Medicare. Revenues allocated to making the Medicare trust fund “solvent” would be dollars unavailable to, for instance,  close the “donut hole” in the Medicare drug benefit (three-quarters of which is funded through income tax dollars). It is all the same money.

Converting this chunk of Medicare funding to a progressive income tax, rather than a regressive payroll levy, is an interesting idea. But doing it in this ad hoc way, and only for the very wealthiest taxpayers, seems pretty clumsy. But the worst part is that it will force me to stop calling the Medicare levy a payroll tax. If this bill passes, it will henceforth have to be known simply as the Medicare tax. Something else to try to remember.