An aging population and the Medicare safety net make health care costs the single biggest threat to America’s fiscal future. The Obama administration is leaning on the rich to help foot the bill with two new Medicare taxes, both targeting the well-off. They take effect this year.
Progressives who favor the levies might want to think again. Neither is a great idea, and one of them complicates a reform with far greater potential.
The first is an extra Medicare payroll tax of 0.9 percent, on top of the standard 1.45 percent, on earned income above $200,000 for single filers or $250,000 for joint filers. The second is a Medicare surcharge of 3.8 percent on the net investment income of persons above the $200,000 and $250,000 thresholds. The government defines investment income for this purpose as the sum of all capital gains, dividends, and interest, along with rental income and the proceeds of passive investments, in which someone puts money into private businesses but plays no active role.
Tapping the wealthy with these two taxes is fine with economist and columnist Paul Krugman. “I’m not a fan of the Tax Foundation’s work,” he blogged, “but their analysis of the distributional effects of Obamacare looks about right: significant benefits to the bottom half of the income distribution, paid for largely by taxes on the top few percent (the Medicare surcharge and the extra tax on investment income).”
These laudable results, however, hold no answer to a larger tax policy question: Since when did health care costs become the special responsibility of the rich? If the costs are a shared national responsibility, what’s up with dedicated health care taxes on the affluent?
There’s a better way to generate more federal revenue, and to sharply reduce income inequality as well. The government should tax income from wealth and work at the same rates, as President Ronald Reagan did with his signature Tax Reform Act of 1986.
Today, tax-advantaged income from capital gains and dividends is the biggest driver of income inequality.
Similarly, taxing wages and investment income at the same rates is the surest way to shrink inequality. (Some shrinking, of course, will occur in 2013. Taxes on stock market gains and dividends are rising to 20 percent from 15 percent, and will hit 23.8 percent with the Medicare surcharge included. Earners at the very top will also be hit with the increase in marginal rates.)
The rich couldn’t claim they were being singled out if Obama seized the moment to press for the Reagan-era policy. The Simpson-Bowles deficit commission came down in favor of the idea. So too did a second blue-ribbon deficit reduction blueprint, the Rivlin-Domenici plan issued by the Bipartisan Policy Center.
Besides its debatable focus on the rich, the Obama surcharge on investment income has two other disadvantages:
First, any inflow to the Treasury is inherently subject to the ups and downs of the financial markets, which is hardly desirable for spending that won’t rise and fall in tandem with them.
Second, it complicates the otherwise clean case for equal taxes on all income. A simple way to overcome these disadvantages is to scrap the surcharge. That could become a bargaining chip: the surcharge would end when equal taxes on work and investment income take effect.
The new Medicare taxes were no doubt well-intended. All the same, dedicated healthcare levies on the rich only muddle the issue of equal taxes on earned and unearned income.
They could set a troubling precedent as well. Should the rich pay a higher dedicated tax for national defense? For environmental protection?
It’s time to restore Reagan’s equal taxes on wages, capital gains, and dividends. If that reform were enacted, and a financial transactions tax introduced along with it, America’s future budget deficits could vanish.