President Obama's Health Care Proposal Includes Reform of Medicare Tax Championed by CTJ


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On Monday, the White House released its health care reform proposal, bringing together the elements of the health bills already approved by the House and Senate. The proposal is the result of months of negotiations between Democratic leaders in the House and Senate and is an attempt by the President to nudge the chambers along towards agreement.

One of the disagreements between the House and Senate has been over how to finance the reform. Both chambers would rely partly on savings from within existing government health programs and partly on new revenue measures. The largest revenue-raiser in the House version is a high-income surcharge on millionaires, while the largest revenue-raiser in the Senate version is an excise tax of 40 percent on insurance companies for each high-cost benefits plan they provide.

Analyses from CTJ concluded that the House surcharge is very progressive and, despite claims to the contrary, would have no noticeable impact on small businesses. The Senate's excise tax, on the other hand, would impose costs that would be passed on to many middle-income families, and would make the overall tax system less progressive than it is now.

Before the Senate approved its bill on Christmas Eve, the excise tax was softened somewhat, and another revenue-raiser was added: an increase in the Medicare tax by 0.9 percent for wages in excess of $200,000 for unmarried taxpayers and $250,000 for married couples. While this made the bill more progressive overall, there were still rumblings, particularly in the House, about the potential impact of the excise tax for high-cost health insurance plans.

President Obama's Proposal

The President's proposal has resolved this issue to a significant degree by further softening the excise tax for high-cost health insurance and adding another element to the Medicare tax. The Medicare tax would now apply to investment income, which is currently exempt.

In other words, the Medicare tax would be expanded in two ways. First, an additional 0.9 percent would apply to wages in excess of $200,000 for unmarried taxpayers and $250,000 for married couples. Second, the existing 2.9 percent Medicare tax would apply to investment income for the first time (but only for taxpayers with adjusted gross income above $200,000/$250,000).

Citizens for Tax Justice is currently working to produce estimates of the impact of this change, but given that only the richest two percent have incomes over the $200,000/$250,000 threshold, this is obviously a tax increase that does not affect low- or middle-income people at all.

Why the Medicare Tax Needs to Be Reformed

Starting in May of last year, Citizens for Tax Justice worked with a broad coalition of policy advocates, think-tanks, faith-based groups and labor unions to bring progressive financing options like this to the attention of members of Congress. Early on, CTJ pointed out that while lawmakers scrambled to find revenue to finance health care reform, they were ignoring a huge hole in the one large tax we already have to finance health care.

The Medicare payroll tax is a 2.9 percent tax on earnings, half of which is nominally paid by employers while the other half is nominally paid by workers. (Economists agree that workers ultimately pay the employer half as well, in the form of reduced wages or benefits.) We noted that this existing tax for health care completely exempts people who live off of investment income.

Imagine someone who does not have to work because he or she collects capital gains, stock dividends, interest, rents, royalties, or others type of investment income. This individual does not have to pay any payroll tax (Medicare tax or Social Security tax) on this income. Eligibility for Medicare is still possible upon reaching age 65 as long as he or she worked (and thus paid the Medicare payroll tax on earnings) for about ten years at some point in the past.

By the time she reaches age 65, even Paris Hilton may have appeared on television and in other venues enough to have worked a full ten years (and thus be eligible for Medicare). But something tells us that there will be a whole lot of years when she did not work and didn't have to pay a cent towards Medicare. Under the President's proposal, everyone will contribute towards the health of the nation, and the tax system will be fairer overall.

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