Obama’s Medicare UnPayroll Tax

By :: March 11th, 2010

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.   


  1. Anonymous  ::  5:30 pm on March 12th, 2010:

    It's almost a VAT, except that individuals must pay it on salary rather than having businesses collect it instead. Of course, conservatives are afraid of a VAT, since it would make the tax too convenient to levy (which would then make it easier to adequately fund Medicare).
    A subtraction VAT that consumers never see should fund Medicare, health insurance tax exclusions and Medicaid. The libertarian “out” on this should be a tax exemption provided that firms covered all retirees and past employees privately.

  2. Anonymous  ::  6:45 pm on March 13th, 2010:

    See http://www.barackobama.com/pdf/taxes/Tax_Plan_Facts_FINAL.pdf:
    FACT #3: Under the Obama Plan, No One Will Pay Higher Tax Rates Than They Paid in The 1990s. Barack Obama believes that any responsible candidate must put forward specific ideas of how they would pay for their proposals to put us back onto the path of fiscal responsibility. That is why he has called for repealing a portion of the tax cuts passed in the last eight years for families making over $250,000. But he would limit all rates to be at or below what they were in the 1990s. Families making over $250,000 would pay the 1990s marginal income tax rates – of 39.6 and 36 percent – and capital gains and dividend tax rates of 20%. Obama’s 20 % capital gains rate is the lowest rate from the 1990s, and his 20% dividends rate is 39 percent lower than the rate President Bush proposed in 2001, and lower than all but 5 of the last 92 years we have been taxing dividends. [emphasis added]

    Is Obama already planning to break is campaign pledge? Or, will he now oppose the expiration of the Bush tax cuts for top income groups in order to prevent tax rates from exceeding levels in the 1990s?

  3. Anonymous  ::  4:24 am on March 14th, 2010:

    I say tax the rich who can afford it instead of the poor people who hardly have food to eat. Oh wait then they couldnt afford their 15 cars cry me a river.

  4. Anonymous  ::  6:09 am on March 14th, 2010:

    Bush's tax credits gave the same rich people $1.8 Billion dollars they took from everyone else. The health care taxes only pay back half of what they took from us. Last year the wealth of the world's Billionaires increased by 50%. 44,000 people die every year who would otherwise live had they access to health care they can't afford to buy. I don't want to hear what a bad thing Obama's doing to the wealthy 1% who have yet to pay income tax on their hidden offshore accounts of who knows how many millions they hold illegally from tax revenues.

  5. Anonymous  ::  7:00 am on March 14th, 2010:

    Reid will ram the reconciliation bill on National Healthcare through the Senate over the protests of many Democrat Senators such as Senator Byrd (D.WVa).
    First, we need to plug the 50% hole in Medicare entitlements with taxes!
    Medicare is currently $38 Trillion in debt which is $260,000 per taxpayer, including welfare mothers. (http://www.washingtonpost.com/wp-dyn/content/article/2010/02/25/AR2010022504074.html)
    How will we pay this? The most the 142.3 Million average taxpayer paid was $7,000 in 2009.
    On Oct. 11, 2009 Former Federal Reserve Chair for 20 years, Alan Greenspan said that 50% of Medicare is taken from borrowed funds and there’s a limit to how much people will loan the US treasury. Greenspan: “We have a huge fiscal hole out there: Medicare’s benefits are only 50 percent funded…. And …that implies is a … significant issuance of Treasury securities to meet the ever-growing and …indeterminately large federal deficit. You cannot continue to increase the federal debt. …” (http://abcnews.go.com/ThisWeek/Politics/transcript-alan-greenspan/story?id=8743279)
    Adding $ 2.7 Trillion for national healthcare (http://www.washingtonpost.com/wp-dyn/content/article/2010/02/25/AR2010022504074.html )
    to $10.3 Trillion in additional welfare entitlements (http://www.heritage.org/Research/Reports/2009/09/Obama-to-Spend-103-Trillion-on-Welfare-Uncovering-the-Full-Cost-of-Means-Tested-Welfare-or-Aid-to-the-Poor ) means paying an extra $12.7 Trillion ($12,700,000 Million) in the next 10 years; dividing by 142.3 Million taxpayers= $90,000 in additional debt per taxpayer, including welfare mothers. To pay for this congress would have to increase taxes by 229%, but they won’t; they want to add debt.
    We already owe $38T Medicare debt, $260,000 per taxpayer [$520,000 per real taxpayer]. (http://www.washingtonpost.com/wp-dyn/content/article/2010/02/25/AR2010022504074.html.)
    If creditors demand only 8% interest, the debt will double to $1,000,000 per real-taxpayer in nine years according to the rule of 72 (http://en.wikipedia.org/wiki/Rule_of_72). You’d have to save $100,000 a year for 10 years to amass $1,000,000. How many taxpayers with some disposable income have that kind of money?
    The moral of the Medicare debacle is “Don’t borrow for entitlements.” However, that’s what the newly elected Democrats are doing. They borrowed an additional $10,000 per taxpayer this year to pay for temporary NEW ENTITLEMENTS and intend to borrow $9,000/taxpayer EXTRA each year for 10 years to pay for PERMANENT NEW ENTITLEMENTS. What’s the point in promising things that will be gone in a year? To prove that they can destroy everyone’s lives? If nothing is done to stop congress, we will hit the wall in two to four years instead of ten.
    What can the US pay? In 2009 US got $7200/taxpayer. [$1Trillion divided by 142.Million taxpayers= $7,022 per taxpayer.] (http://www.irs.gov/pub/irs-soi/10winbulindincretpre.pdf)
    Without restraint in entitlements, the government will have to repudiate its debt; causing hyperinflation as Germany in 1923, Brazil in 1980s. Hyperinflation makes money worthless, destroys the middle class and starves the people. (http://en.wikipedia.org/wiki/Hyperinflation ). We need to freeze entitlements, pay for what we are not and come up with a payment plan.
    O'Bama could pay for healthcare as the Europeans do with an addition of a 20% sales tax called a 'Value Added Tax', but O’Bama won't. http://ec.europa.eu/taxation_customs/taxation/vat/how_vat_works/index_en.htm
    He's proposed a tax on the rich that'll drive them to go to Canada, Europe, and other countries and take their job-producing ideas and factories offshore with them as it did for the British when they used similar economic tactics in the 1950s.http://www.prism-magazine.org/dec06/feature_europe.cfm

  6. Anonymous  ::  1:48 pm on March 15th, 2010:

    The poor don't owe for the debt, since the debt is based on the taxing power of the United States. If you don't pay taxes (specifically income taxes), you don't owe debt. Now, should a VAT or an increased payroll tax be rolled out to cover future Medicare and Medicaid obligations, as well as health insurance tax exemptions and subsidies? Probably. This President probably won't do it, but you never know. We will see what his Deficit Reduction panel has to say about it.

  7. Anonymous  ::  9:19 am on March 23rd, 2010:

    You know sometimes a president cant fulfill his promise but it doesnt mean he broke it. Things happen as time goes by and desperate times calls for desperate measures. One reason for Obamas desperate measure was the procrastination from the right constantly bashing the health bill and the teabaggers going bananas over nothing because i know for a fact none of them make $250,000. It still startles me how one teabagger was so frustrated with Obamas bill that he wanted the whole world to know that the government should keep their damn hands off his Medicare. There's someone we should look up to. I mean, look how long this took; over a year. Yet the right will still have the nerve to say it was rammed down their throats. And while this was going on we were still losing jobs by the bulk and our debt kept increasing. So is it really breaking a promise when the other half of congress is holding us up?

  8. Anonymous  ::  7:55 pm on July 27th, 2010:

    At 17% Health expenditures of GDP, and 35th in healthcare access in the world, I think there's definitely something gone awry in the system. But I've said before and I'll say it again.
    It's not healthcare reform, what we need, it's healthcare transform!

  9. Anonymous  ::  2:55 pm on August 4th, 2010:

    It is all about how you handle the situation. To be honest what the bill entails seems too good to be true. And as you rightfully mentioned there is something fishy about the way there is not much of a hue and cry even though it is evident who is going to face the crunch. There must be some understanding between the creators and those to be taxed! This is how all this tax code games have made me!

  10. Anonymous  ::  11:56 am on September 2nd, 2010:

    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.

  11. Anonymous  ::  11:41 am on October 8th, 2010:

    high-income individuals will pay higher Medicare taxes – in my opinion this not fair to those people who have higher income.Irena from cheap web hosting

  12. Anonymous  ::  12:41 am on October 15th, 2010:

    I'm glad to hear they are cutting tax break for the rich to redistribute the wealth. This should help my clarinet overhaul business.

  13. Anonymous  ::  4:37 pm on October 15th, 2010:

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  14. Anonymous  ::  6:30 pm on October 16th, 2010:

    I really enjoyed reading this post, big fan. Keep up the good work and please tell me when can you publish more articles or where can I read more on the subject?
    Thankyou on behalf of the Communication Skills team.

  15. Anonymous  ::  5:58 pm on November 9th, 2010:

    Obama’s Medicare UnPayroll Tax is something absolutely new and at the same time I concider this to be one of the worst changes of the last time, we can go striking, we can write a custom essay, we can start aditation and social campaigns!
    We can do everything. All you have to do is to understand the importance of doing your part

  16. Anonymous  ::  4:12 pm on November 18th, 2010:

    This tax policy has got its pros and cons!
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