Health and Taxes
Health reform is (almost) law. And while the Senate must still agree to a package of technical fixes approved by the House late last night, we now can see historic changes in the way we will buy health insurance. We can also see big new tax increases, at least for some relatively high-income people. But the most important won’t take effect for years. And there’s the rub.
I have never quite seen a law so full of powerful tax bombs attached to delayed fuses. The two biggest: A stiff new Medicare tax on high-earners that does not bite until 2013 and a tax on high-cost health insurance that does not kick in until 2018—long after the end of an Obama second term, if he has one.
Take the Medicare tax. Singles earning more than $200,000 and couples making more than $250,000 (in modified adjusted gross income) would pay an extra 0.9 percent of their wage income. Plus, they’d pay an entirely new tax of 3.8 percent on investment income. This effectively raises the rate on capital gains and dividends from 15 percent to nearly 19 percent. Initially, only about 2 percent of taxpayers would face the higher rates. But in an echo of the disastrous Alternative Minimum Tax, the earnings floor is not indexed for inflation so eventually many middle-class taxpayers could be hit by the levy. By 2018, the new tax would generate $37 billion.
The “Cadillac” tax on high-cost health insurance is the fave of nearly every economist, although it is widely disliked by the public. The current system that excludes the value of health care from tax is unfair since it is far more beneficial to high-earners (whose after-tax cost of insurance is reduced by 35 percent) than to low-wage workers (whose cost may be reduced by only 10 percent). It is also a big reason why consumers of health care are so disconnected from the true cost. After all, who cares about getting that unnecessary MRI if insurance is paying anyway?
Taxing those high cost health plans would encourage employers to offer cheaper policies, and workers could expect to get at least some of the cost savings back in wages, though economists argue endlessly about how much.
The final House-Senate compromise would change that–eventually. Health coverage in excess of $10,200 for individual plans and $27,500 for family plans would be hit with a 40 percent excise tax. Keep in mind the tax is only on the amount in excess of the floor, so with an $11,000 individual plan, only $800 would be taxed (the 40 percent rate would yield the government $320).
There are all sorts of exceptions. And the tax is indexed for inflation plus 1 percent. Today, the average family policy costs less than $14,000, far below the threshold. But since health costs have been growing much faster than regular inflation+1, the new tax would eventually hit many more workers—unless we can control medical costs. This tax is potentially a health care game changer. But it won’t take effect for 8 years.
Will any of us ever pay either tax? Who knows? The odds are very high that Congress will enact a significant tax reform long before anyone ever pays the Cadillac tax. And unions are poised to kill it. Similarly, the Medicare tax will be hugely controversial. Plus it eliminates a major revenue option for those who want to find new taxes to help balance the budget.
In the end, I’m betting that nobody will pay these taxes in quite the way the new law requires. It will be fun, however, to see how they change.
thanks for the note..
Tax should be prosperous society, especially those on low incomes. And as good citizens we have to pay taxes.
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Singles earning more than $200,000 and couples making more than $250,000 (in modified adjusted gross income)
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I have a question I haven't been able to find the answer to anywhere (maybe it isn't known yet). How is this policy going to implement a payroll tax that's based on household income? That is, neither my husband nor I makes more than $200,000 annually (meaning that, as far as either of our employers knows, they don't need to contribute “new” payroll taxes on our behalf), but combined we make more than $250,000. Which of our employers is responsible for the employer portion of the payroll tax on household income in excess of $250,000? Does this require disclosing to my employer how much my husband makes (and vice versa)? To put it more succinctly: there's a reason that payroll taxes are based on individual income and income taxes on family income. This policy makes that a whole lot more complicated.I have never thought that surfing online can be so much beneficial and having found your blog, I feel really happy and grateful for providing me with such priceless information. Chicken nesting boxes ideas
I agree
It seems the more we are taxed the more government spends. I agree with the above if they can't find a worthy cause it will go for something silly (tattoo removal) As it stands now I cannot afford medical and or dental insurance.
More taxes? Don't forget that economic truth, the more you are taxed, the more the government will spend, on all it's pet projects, not necessarily the one you wanted. The stimulus package provided for 'TATOO REMOVAL” while Americans were loosing jobs…or how about that little fish that no one knew existed, the stimulus packages has spent millions to make sure it survives….what about the out of work families? Fatcow Review
Well i disagree about learning from Canada's heathcare system. Talking to a lot of my friends who live elsewhere, it's the last thing we need here in the US. do follow
Even I am quite curious to see how they manipulate the whole filing back taxes issue. A very smart move to make sure that they please the public and pretend to tax the higher income group but make sure that this tax will not be levied until a fair amount of time passes. More than evident than many more reforms are on the cards? And in the bargain also making sure that taxes are collected very slyly from the commoners.
I suppose nothing is perfect. If we want more help from the government, we should expect for things to be taken out of our own pocket by now.
I just found the TPC report on McCain's plan. You can read it at http://www.taxpolicycenter.org/UploadedPDF/411749_updated_candidates.pdf You can read my speculative piece on my Iowa Center for Fiscal Equity blog, which is linked to my name.
This is all making the tax picture a bit more complicated, especially when you consider the work to be undertaken this year on how to deal with expiring Bush tax cuts and whether the GOP will cooperate or obstruct if they don't get their way – I am betting on the latter – since if they wanted compromise they would have made it in 2005 when they still had the majority – or even 2007 before they lost the White House. Either way, the capital gains and investment tax cuts of 2003 are soon to sunset to late Clinton era levels (which likely helped fuel the Tech Bubble which caused the 2001 recession).
I wrote about a similar topic on my blog regarding taxing Cadillac insurance with one crucial difference. I wrote about what would have happened if McCain had won the election and picked up congressional seats instead of losing them. In that case, the health plan which would have been passed would have taxed all comprehensive insurance above the $5000 credit, although I do not recall whether HSAs were also tax exempt (I assume they would have been).
I suspect that it would not have been long before employers dropped comprehensive insurance, which would have killed the expanded tax base on the program. While I don't think this was a big issue in the election, it cannot have helped McCain much.
It might be fun if you reposted the analysis done in 2008 on the McCain health plan, just to remind people of what the Republican plan really would have been.
At any rate, tax reform will likely include some of these fixes, since they fall into the ruberic of a VAT anyway (with the paying firm rather than the investor paying the extra taxes on unearned income).
I know I sound like a broken record, but I think the best we can do would be a Business Income Tax (Subtraction VAT) as a substitute for low rate income taxes, non-retiree/retiree survivor payroll taxes, self-employment taxes, schedule 1040 – C reporting and corporate income taxes. The rate should be high enough to fund Medicare, Medicaid, Health Insurance subsidies or a public option/single payer plan, Disability Insurance, non-retiree survivors insurance, remedial education with a stipend (replacing TANF), military retirement and income support for families through a vastly expanded Child Tax Credit (funded by an end to the Mortgage Interest and Property Tax deductions).
A separate receipt based VAT would fund domestic military and civil discretionary spending. Both VATs would be regionally based with a requirement that taxing and spending be balanced, except during a recession in the region with unbalance allowed until there are two straight quarters of job growth in the region.
Net interest, overseas military and civil operations (including IMF debt forgivementss), debt repayment (especially the FICA trust fund), retirement fund personal accounts (Social Security and military retirement) and regional deficit finance would be funded by a graduated income surtax between 3% and 23% on incomes over $75K individual/$150K joint and borrowing if required.
There is no employer part to the additional tax.
That's the case for the employee portion, but what about the employer part? Whether my husband or I withholds (or pays later) the employee part obviously doesn't matter, but I imagine that our respective employers would care which of them is responsible for the employer contribution.
You can find more detail in this JCT publication. It looks like if both you and your spouse make less than $200,000 individually, but more than $250,000 combined, neither employer would be required to withhold the additional amount. It would be your obligation and responsibility to either adjust your withholding or make appropriate estimated payments.
I have a question I haven't been able to find the answer to anywhere (maybe it isn't known yet). How is this policy going to implement a payroll tax that's based on household income? That is, neither my husband nor I makes more than $200,000 annually (meaning that, as far as either of our employers knows, they don't need to contribute “new” payroll taxes on our behalf), but combined we make more than $250,000.
Which of our employers is responsible for the employer portion of the payroll tax on household income in excess of $250,000? Does this require disclosing to my employer how much my husband makes (and vice versa)?
To put it more succinctly: there's a reason that payroll taxes are based on individual income and income taxes on family income. This policy makes that a whole lot more complicated.