Congress Levies Huge Healthcare Tax on Unearned Income

Published April 6, 2010

Less than a week after the party-line passage of healthcare overhaul legislation, the U.S. Congress agreed on tens of billions of dollars of new taxes on “the rich” to help pay for it. President Obama signed it into law on March 30.

“Today, we mark an important milestone on the way to health insurance reform,” said the president at the signing.

For the first time, the federal government will impose a special tax on the unearned income of high-earner married couples (above $250,000) and high-earner singles (above $200,000). The centerpiece is a 3.8 percent Medicare surtax on capital gains and other investment income.

Federal officials project this additional revenue source to bring in more than $200 billion in the first seven years.

$30 Billion a Year
The congressional Joint Committee on Taxation estimates the new Medicare tax on investments will generate more than $30 billion annually, or $210.2 billion from 2013 through 2019. Investment income includes such sources as rental income, dividends, interest, and income from trusts, annuities, and capital gains.

“The thresholds cited in the study are not indexed for inflation in the bill. Therefore, assuming no other changes were made to the provision, more and more taxpayers will be hit by this provision as we move later into the decade,” said Tax Foundation President Scott Hodge.

‘Economy Killer’
“The capital gains rate is already set to rise from 15 to 20 percent in 2011,” noted Americans for Tax Reform Tax Policy Director Ryan Ellis, referring to the expiration of tax cuts enacted during the George W. Bush administration. “This new surtax would result in a capital gains rate of 23.8 percent in 2014. A close-to-24 percent capital gains tax rate is an economy killer in the United States.”

“These proposals are a radical change from U.S. tax policy without much debate at a time when we should shift the fundamental core of policy in a more pro-saving and investment direction,” said Mark Bloomfield, president of the American Council for Capital Formation (ACCF). “We already have a shortage of saving and investment in the United States.”

A 2008 report by Ernst & Young LLP compares individual long-term capital gains taxes among 25 major international trading partners of the United States. The U.S. capital gains tax rate already compared ‘unfavorably’ to those of most other major economies before the upcoming scheduled rate hikes, said ACCF Communications Director Mike Burita,

“More than half of the countries surveyed have individual capital gains tax rates lower than that of the United States,” Burita said. These new taxes may move our country into an even more unfavorable position.”

ACCF states a low capital gains tax rate has an “important role to play” in fostering economic growth, and lowering taxes on capital gains has been a “crucial element in promoting the entrepreneurial drive” on which the U.S. economy thrives.

The Tax Foundation’s Hodge notes a single taxpayer would pay an additional $0.90 in Medicare taxes for every $100 earned in excess of $200,000—on top of the current Medicare tax total of $5,802.90 annually, including the employer share, the person would pay on $200,000 of earnings.

A married couple with $5 million in investment income would see a Medicare tax increase of $180,500 annually. Currently, such income is not subject to a Medicare tax.

Determined Democrats
The Senate approved the changes by a margin of 56 to 43 in a mostly party-line vote. The U.S. House of Representatives concurred by a vote of 227 to 207.

Not one Republican voted ‘aye’ on this final phase, and 35 Democrats disagreed with their own leaders—including three in the Senate. Democrat Senators Blanche Lincoln and Mark Pryor of Arkansas and Ben Nelson of Nebraska joined 40 Senate Republicans in opposition.

Congressional Republicans had worked vigorously to stop the tax hike.

“The important thing now is to replace those who voted for the healthcare bill [including reconciliation] and to repeal it when we get some new members here,” Senator Jim DeMint (R-SC) told Fox News Channel’s Sean Hannity after the final vote.

A simple majority was needed for passage because the House and Senate majority leaders used the budget reconciliation rules to preclude any Republican filibuster, which would have taken 60 votes in the Senate to overcome.

John W. Skorburg ([email protected]) is associate editor of Budget & Tax News and a lecturer in economics and finance at the University of Illinois at Chicago.

Internet Info

“Examples of Taxpayers Facing Medicare Tax Increase under Health Care Bill,” Tax Foundation Fiscal Fact No. 219: