The New Medicare Tax

Friends have warned me about the new Medicare tax, 3.8% of one’s investment income.  Since the tax only applies to people with higher incomes than mine, I am regrettably not liable for this tax. But what is the economic reason for putting an extra tax only on the investment income of the very well-off?

All Americans are eligible for Medicare at 65 (an age minimum that should be raised).  Why should somebody with $100,000 in investment income but no earnings pay no Medicare tax, while someone who earns $100,000 from a job pays $1,450 herself, and $1,450 through her employer to finance Medicare?  This seems inequitable.  The tax on all investment income, regardless of one’s total income, should be the same as what one pays on self-employment income — 2.9%.


Jesse

Nothing is stopping you from sending an extra 3.8% to the US treasury.

Thomas Meixner

Nothing is stopping you from turning down Medicare and other forms of public assistance.

Jesse

True, but irrelevant to this discussion. I am young and I work, therefore I pay taxes to support unproductive people who benefit from programs I will more than likely never use. Futhermore, If I could opt out of Medicare and Social Security, including not having those taxes withheld from my paycheck, I would gladly do it! Unfortunately, the statists in Washington have devised programs that are so good, they must use force to keep people locked into them.

jonathan

Huh? Isn't this true: beginning in 2013 you must pay 0.9 percent more in Medicare taxes on earned individual income of more than $200,000 ($250,000 for married couples filing jointly). That means 3.8% for higher incomes. The employer rate stays the same; the increase is the employee share. Yes, self-employed people pay 2.9%, but I think that rate may have been left as is because the self-employed have to pay the full social security contribution from both employee and employer.

Adam

Because politicians make the rules and not economists!

Andrew D

You're right, but there's this thing called politics. It's a lot easier to sell a tax "on the rich," though not so easy to define it as such.

foosion

>>Medicare at 65 (an age minimum that should be raised)>>

Raising the Medicare age would increase healthcare spending - seniors would pay more for health insurance than the government would save.

Removing the youngest, and therefore likely the healthiest, from the Medicare program would make the cost of covering the average recipient increase, putting further pressure on Medicare financing. At least some of the seniors no longer eligible for Medicare would likely delay some healthcare until they are eligible, and treatment delayed is often more expensive, putting yet more pressure on Medicare financing.

Seems like a rather bad idea.

Eric

Investment income is always treated differently. Taking $100,000 from your employer is not subject to the same risk as the guy who made $100,000 because he invested $1,000,000 in some company who needed capital. Investments are subject to losses that regular income is not. The economics say tax it less because it is inherently risky.

That said, the reason the extra tax is on rich people has much less to do with economics than it does with politics.

And since when was "This seems inequitable" a valid argument to a Freakonomics writer?

Cameron

Additionally: Maybe the reason the investment income shouldn't be taxed for Medicare is because it has already been taxed (at least once, often more times) for the first time the money was made prior to investment.

I 100% agree with Eric, investments are a risk, not a guaranteed contract of payment. I guess the government (rightly, in my opinion) thinks risk is a good thing for business, and so taxes it less.

Alan T

All Americans are eligible for Medicare at 65 (an age minimum that should be raised).

Since Medicare was established, the real amount that Medicare spends per recipient has risen by a factor of 5, whereas the real cost of private health insurance has risen by a factor of 8. Therefore medical care through private health insurance is 8/5 = 1.6 times more expensive than Medicare. Shouldn't we therefore offer Medicare for all, regardless of age, and increase taxes to pay for it? Wouldn't this save thousands of dollars for each person who currently has private health insurance?

Michael

Right now I pay both for my own private health insurance and also for someone else to get medicare. If your suggestion would let me pay only one of those, and the payment less than the sum of the two, I'd be in favor. Instead I'm very skeptical this wouldn't have me spending more to get a crappier health care service.

Phil Persinger

Michael--

Despite the best efforts of individual physicians, nursing staff and hospitals, the statistics point to an already pretty crappy health-care system in the US. In contrast, look to the other industrialized countries, all of which have universal health-care systems of one sort or another, and see their better performance: longer life-spans, lower infant mortality, etc., for up to 50% savings over US expenditures.

A universal health-care system would do away with Medicaid (and the largely-regressive means by which it is financed), would fold Medicare enrollees in with the general population (and thus spread out their end-of-life medical expenses) and eliminate situations where, like the Ground Zero workers, individuals are forced to sue in court or to lobby Congress to cover extraordinary medical expenses which those individuals' insurance companies choose not to honor.

With that system, you'd be getting a much better deal for a lot less money and agita. Just ask a Canadian....

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Paul

This is a similar question to why capitol gains tax is lower than income tax. It is important to take into account that the invested money has already been taxed. If I have say 100k invested that is past income I earned, I likely already paid at least 30k in taxes on it. I don't get to invest that 30k. I would pay tax on the interest earned from the 100k but my overall returns will always be lower because of past taxes.

Just something to consider.

Eric

Sunk cost fallacy - earning 1.5M and paying .5M in taxes is no different than finding 1M in a hole in the ground.

Pete

I believe investment money is money one has already been taxed on at the "income" rate. (You have already paid the tax when you earned the money. Now you take what's left over the tax has been taken from you and invest it. When that investment makes money, you are taxed on it again only at a lower rate. (Realistically, however, you are being taxed on the same money twice.) So actually, the individual who is paying a lower or "no tax" on investment income has already paid the tax when it was earned.

Pete

It has always bothered me from a concept standpoint that one individual pay more tax than another when each receives the same service from the government and all have the same one vote influence.

Matthew

Unfortunately, this discussion has no place on any site related to economics because the motivation was completely political. This was all about what would play best in a sound bite ("only the richjetownermillionairesandbillionaires will pay this tax") and not what is equitable or even designed to incentivize behavior or maximize tax revenue. The Democrats had to stick revenue sources into Obamacare to get the numbers where they wanted. No more, no less.