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House and Senate negotiators considering new Medicare tax

In the House/Senate negotiations, Democrats want to make three major changes to the health-care bill, all of which cost money. First, they want to weaken the excise tax, which means less revenue. Second, they want to increase the subsidies, which means more spending. And third, they want to extend some version of the Nebraska deal federalizing the Medicaid expansion to all the states. That, again, is pricey. So where does all the new money come from? Martin Vaughan and Laura Merckler report on one new idea:

Currently, the Medicare tax applies only to wages, without any limits. The 2.9% tax is divided in half, with workers and employers each paying 1.45%. The health bill passed by the Senate would raise the worker contribution to 2.35% for individuals making more than $200,000 a year and couples making more than $250,000 a year.

Under the proposal now being considered, people making more than those amounts would also pay the Medicare tax on dividends and other income from investments, the people familiar with the talks said. Income from pensions and retirement accounts, including 401(k) accounts, would be exempt.

A version of this that was previously introduced by Sen. Debbie Stabenow raised more than $100 billion over the first 10 years, so there's significant money to be found here. Why Democrats prefer a new Medicare tax to, say, capping the itemized deductions rate at 28% for taxpayers making more than $250,000 is, however, beyond me. And if you did that, you'd have more than $300 billion in new money to play with.

By Ezra Klein  |  January 12, 2010; 11:26 AM ET
Categories:  Health Reform  
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Comments

They want to create a tax that is so complicated to understand and calculate that people can't quickly see how it will affect them, unlike a simple increase in the income tax for the wealthy. Smoke and mirrors.

Posted by: AuthorEditor | January 12, 2010 11:43 AM | Report abuse

Remember if Congress doesn't extend the high-end Bush tax cuts this year, they will revert next year to the 1990s level of 37.5% and 39%, IIRC. People above $250,000 AGI (which does NOT include me) need to think about what mix of taxes they want too pay--slightly higher marginal rates on ordinary income (from the Medicare tax), a minor increase in taxes on dividends (ditto), even higher marginal rates or my favorite, end the preferential tax on dividends, which has probably done the most to skew income inequality. The Medicare tax extension is a good first step toward ending the preferential rate on dividends.

I'd end the preferential rate and exempt the first $3000 in dividends in American companies. This is roughly comparable to what we had in the 1960s and 1970s, when the exemption was $600.

Posted by: Mimikatz | January 12, 2010 11:45 AM | Report abuse

I think you know why the Senate prefers a Medicare tax. A limit on charitable deductions hits at the politically powerful beard-pulling set. By contrast, the Medicare tax is easily dodged by those determined to avoid it (for example by creating a defined benefit pension). Finally, there is important symbolism involved. Those who want to destroy Medicare have set their sights on payroll taxes, hoping that if the dedicated funding mechanism can be undermined then political support for the program will begin to erode.

Posted by: bmull | January 12, 2010 11:51 AM | Report abuse

If I understand correctly - capping deductions at 28%: that would hit high housing price folks like Bay Area where large part of wages go into mortgage interests.

Now I know that you would like to even take a crack at the mortgage interest deduction. That will happen or will have to happen eventually. Let us get started with health benefit deductions first.

Otherwise, the concept of extending Medicare beyond wages is needed to bring in more funds. I am not sure to start with whether it should be fully open ended for all dividend / interest / capital gain income. May be Medicare tax can be in a band - it starts after this non-wage income is more than $3000 and it goes up to some certain upper limit (as pointed out earlier).

Why upper limit? After that point - plain and simple income tax should be high enough and the tax money should simply go to general budgetary fund at that point instead of specific bucket like Medicare or Social Security.

Anything which removes differences between capital gain tax and ordinary tax should be welcome too. More and more people will be getting money via non-wage means so there should not be much special treatment there.

Posted by: umesh409 | January 12, 2010 12:25 PM | Report abuse

Please let the excise tax just get a minor trimming. It sounds like this is the kind of thing that you get when you need to quickly hash out a fix based on politics rather than policy. Sure, capping deductions or just including capital gains as normal income and not set aside with its own rate would be more efficient solutions, but they're not the kind of quick and dirty fixes that can survive this process.

Posted by: etdean1 | January 12, 2010 12:32 PM | Report abuse

I'm starting to think it might not make any difference. I live in Mass, and I'm sensing a Republican surge. Could be wrong, but I just clicked a link on Boston.com's site polling folks on who won last night's debate. Results were running 70-30 in favor of the Republican. Sure, no doubt every winger in the country is trying to influence the race, so you've got to take these things with a grain of salt. But 70-30? (and yes, having the opinion that Brown won the debate doesn't mean you're going to vote for him, but still).

I'm almost thinking a Brown win would be a blessing in disguise, if that forced Pelosi to pass the Senate bill "as is." We could then avoid some of the problems with House input that Ezra is describing. Also, although I want her to win, I can't say in my heart of hearts I'm enthusiastic about having Coakley represent me in the Senate. If Brown should win, that would give a a better Democratic candidate (Barney Frank? Joe Kennedy? Mike Capuano? Alan Kazei?) a shot at the seat in 2012.

Also, as long as health care gets passed, I can't really see the problem with having only 59 votes, because as it is, at least two of the sixty we now have might as well be Republicans.

Posted by: Jasper99 | January 12, 2010 1:01 PM | Report abuse

Because a charity tax is outside the health care system! They want to raise taxes within the health care system.

Posted by: lancediverson | January 12, 2010 1:38 PM | Report abuse

I'm in the minority here, but I think that the House proposal of increasing the income tax rate on individuals making more than $500,000 and couples making more than $1 million is the best way to go.

Why? It's simpler (I'm working on my estimated taxes now, so I'm focused on simplicity, something sorely lacking in our tax code). It also makes sense, with couples paying the same rate as individuals. Folks with those incomes can afford to pay the additional taxes. This will also give those retirees with large incomes an opportunity pitch in.

I'd keep the excise tax on Cadillac health insurance plans, but have it paid by individuals, coupled with an income-based standardized deduction for health insurance premiums. This would benefit the low salary worker with a good health insurance plan and give the folks buying insurance on their own a break.

Posted by: Beagle1 | January 12, 2010 2:04 PM | Report abuse

Personally, I'm thrilled with the notion of applying the Medicare tax to investment income. A source of frustration for me is that that investment/inheritance income has received favorable treatment over earned income. The biggest scam going is the false marketing by the corporate media that investment is more important to our economy than work (it's equally important...not more)...not to mention the nonsensical argument that investment/inheritance income is "double-taxed".

Thankfully some in the Congress recognize the scam and are trying to reverse the damage.

Posted by: cjo30080 | January 12, 2010 3:06 PM | Report abuse

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