Obama Would Hike Medicare Taxes On Wealthy

Torn between a Senate plan to pay for the health overhaul by taxing expensive insurance plans, and a House plan to pay for it by taxing the rich, President Obama has settled on a third way: Tax the rich, with a twist.

Obama's February proposal would add a new 2.9 percent Medicare tax on wealthy people's investment income and increase the Medicare tax on their wages above $200,000 from 1.45 percent to 2.35 percent. For couples who file taxes together, the threshold would be $250,000. Kaiser Health News has the details.

Here's an example of how it would work. In 2007 Barack and Michelle Obama earned $201,913 in wages. But, between Barack Obama's non-wage income from his two best-selling books and some investments, the couple's total adjusted income was $2,656,902. Under current law, the Obamas only paid about $3,000 in Medicare taxes that year, or 1.45 percent of their earned wages.

 

If the new Medicare taxes had been in place then, the Obamas would have paid — roughly - $75,000 more. The normal rate — 1.45 percent — would apply to their wages, since their earned income doesn't exceed the $250,000 threshold for couples. But, the new, 2.9 percent tax on unearned and investment income would have dinged most of their other non-wage income.

Even though the tax would only hit the richest 2.6 percent of taxpaying Americans, the revenues would add up to a hefty sum, according to the Joint Committee on Taxation. The provision would bring in around $183 billion over nine years, based on the committee estimates of the proposal Obama outlined in broad strokes last month.

According to the president's proposal, the money would be set aside to buttress the government trust funds that pay for Medicare. The main fund, the Hospital Insurance Trust Fund, is expected to be depleted as soon as 2017, and the Center for Budget and Policy Priorities, a progressive think tank that supports the tax says the new revenue could, on paper anyway, keep the fund out of the red for another decade.

However, that assumes the government actually saves the money, rather than spending it on other programs, which federal budget rules allow. New subsidies and a Medicaid expansion that might help cover 31 million low- and moderate-income people as part of the overhaul, for instance, could cost about $830 billion over ten years.

Historically, official Washington is not known as a big saver. As the Congressional Budget Office explained in December, "[B]ecause the government has used the cash from the trust fund surpluses to finance other current activities rather than saving the cash by running unified budget surpluses," the savings and revenue set aside for the fund are often no longer available by the time the Medicare program needs them.

Weaver is a reporter for Kaiser Health News, a nonprofit news service.