Health Care Reform Could Reshape Tax System

Just one week away from the White House’s self-imposed deadline for the House to pass the Senate’s version of health care reform, President Obama has taken the show on the road to drum up support for the plan. One group he could have a difficult time convincing is the wealthiest of Americans who could see a hefty tax increase if the plan is passed.

The latest health care proposal, according to Kaiser Health News, could for the first time impose Medicare taxes on something other than just earned income while at the same time raising the nominal Medicare payroll tax rate for the richest of Americans. 

Historically, employees have been taxed at a 1.45 percent rate for Medicare benefits, regardless of income.  The Obama plan, however, would increase the nominal rate for those earning over $200,000 per year from 1.45 percent to 2.35 percent. 

The plan would also levy an additional 2.9 percent Medicare tax on investment income.  That includes unearned income from interest, dividends, annuities, royalties and rents.  It would mark the first time in history that anything other than earned income would be taxed for Medicare purposes.

According to the Joint Committee on Taxation, the Medicare taxes would bring in $183 billion over 10 years and would affect just the top 2.6 percent of wage earners. 

Even still, it has its detractors.  Many critics say that the economy can ill-afford any new taxes in the midst of a recession.  Others say that it is simply not fair to force the rich to carry more of the burden in a program where the benefits are divided equally. 

“Using new revenue from the Medicare tax to fund health care reform would be as illogical as raising the federal gas tax, which funds highway construction and maintenance, to pay for a new welfare entitlement,” Curtis S. Dubay, of the Heritage Foundation wrote at the organization’s Web site. 

The proposed tax is a compromise position reach after House and Senate Democratic leaders squabbled over how to fund the $950 billion bill that will cover an additional 31 million Americans.  The House version of the bill includes additional payroll taxes on the wealthiest of Americans, which was unpopular in the Senate.  The Senate version contained a so-called “Cadillac tax,” which would levy fees on the most expensive health care plans.  That idea was rejected in the House after strong opposition from organized labor, which argued that many of its members have voluntarily took wages reductions for better health care benefits and that taxing those benefits would be unfair.

The compromise position appears to be the increased Medicare taxes, which proponents say will help sure up Medicare, decrease income inequality and create more fairness in the tax code. 
 
“In addition to helping ensure that the health reform legislation is fully paid for, broadening the base of the Medicare tax for high-income households (by extending it to unearned income) would be sound economically,” Chuck Marr of the Center on Budget and Policy Priorities wrote on the group’s Web site.