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%.

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  1. Jesse says:

    Hidden due to low comment rating. Click here to see.

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    • Thomas Meixner says:

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      • Jesse says:

        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.

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      • Oliver H says:

        @Jesse

        The fact that you are young and work is what is irrelevant to the discussion. Contrary to your claim, there is no telling whether you will use these programs or not. You wouldn’t be the first person who believes themselves to be immortal, only to get a rude awakening at the next trip to the doctor – or simply on the highway driving towards work tomorrow morning.

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  2. jonathan says:

    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.

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  3. Adam says:

    Because politicians make the rules and not economists!

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    • ssinfa says:

      Politicians make rules but don’t live by them…they have their own healthcare plan, and income…and we all pay for them…they give themselves raises when the taxpayers are suffering…they have fantastic benefits etc.

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  4. Andrew D says:

    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.

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  5. foosion says:

    >>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.

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    • IndieGir says:

      This would be true only if Medicare functioned like an independent health insurance policy, where it had to attract younger participants that it could charge more in order to subsidize the older participants. But a significant portion of Medicare costs are paid for in advance and require no ongoing premiums. Specifically, Medicare Part A which covers hospitalizations, nursing homes, hospice, etc, requires no ongoing premiums. Part B which covers regular doctor’s visits and the rest does have a premium associated with it. I don’t know which of these two parts is responsible for the bulk of Medicare expenditures, but I am guessing Part A based on the oft-quoted statistic* that 80% of our medical costs occur in the last three months of our lives. So you’d really have to run the numbers to know if there is going to be any savings, because if the bulk of the costs come from Part A, and you are not getting any additional income from covering younger folks in Part A, including them is simply a net loss.

      * I plead guilty here to not having the exact statistic at hand and if anyone has info to confirm/challenge this it would be interesting.

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    • Cory says:

      “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. ” –> Well, that’s just silly. Let’s say I’m at the store and about to buy a whole cart of stuff. If I take the least-expensive things out, the average cost per item will increase. But my overall bill will decrease, not increase.

      In other words, removing the least-expensive people from the system (i.e. the cart) will lower the overall cost.

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      • Enter your name... says:

        You’re missing the point. Right now, let’s say that a typical person aged 65 costs the Medicare program $100 a month, a specially negotiated low rate. (Any number will do for this example.)

        If this person leaves the program, then the Medicare program will save $100 a month. *But* if they leave the program, then the 65-year-old person has to pay his or her own medical costs. Those medical costs will *not* be at the great Medicare-negotiated rate of $100 a month. Those medical will be the full $150 that the normal, non-Medicare patients are charged.

        So the question is: to get health care to this 65-year-old person, is it better to have Medicare pay $100 a month, or is it better to have the 65 year old pay $150 a month?

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      • Cory says:

        Re: Enter your name….

        You haven’t uncovered any savings. You’ve just uncovered the hidden subsidy of Medicare. As others have pointed out on here, Medicare reimbursement rates are lower than private insurance. In other words, the private market subsidizes Medicare (as well as pays for it in taxes).

        If you move someone off of Medicare, the actual cost (i.e. value of services performed) will not be any less. The difference is that it goes from being a subsidy recipient to a subsidy provider. There is no savings. And it’s also true that the government may be able to get an even lower reimbursement rate if it were to increase the age. That would decrease the total Medicare cost (giving the system more money, allowing private insurance to pay less, or both).

        I’d rather have the 65-year old pay $150/mo. and keep the system alive than have him pay $100, charge me $50, and continue a system that will go broke long before I ever get a chance to enroll.

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      • SAO says:

        You’re confusing cost-shifting with cost-cutting, assuming that hospitals are barely breaking even serving the providing the lowest possible cost services to adequately treat any given problem. There’s zero evidence for this assumption.

        Take Florida if you combine people on Medicare, Medicaid, other public insurance and the uninsured, you get over 50% of the population. So, Florida has a large population on the tighter Medicare/Medicaid reimbursements and what one assumes is a pretty high rate of unreimbursed care from the uninsured who are too poor to pay their bills. If Medicare and Medicaid really under-reimbursed, you’d expect to see hospitals struggling. They aren’t.

        Yet Florida hospitals are doing well. They are busy building big, new facilities. The for-profit hospitals see a good business opportunity and the non-profits have plenty of surplus to reinvest. If they were barely breaking even, you’d see hospitals struggling.

        So, providing that hypothetical 65yo’s care on Medicare for $100 not on other insurance for $150 is saving society $50, because that $150 is born by the risk pool the man is in or by everyone, if he’s uninsured and can’t pay the bill. The difference is whether $100 is paid by tax supported Medicare or $150 is paid by his insurance, whose costs are born by everyone else who has insurance. If you’re concerned about the young subsidizing the old’s health costs, it’s going to happen anyway. It’s merely a question of the mechanism.

        This is why the issue should be the US’s medical pricing — way higher than anywhere else in the world — not who pays. Ultimately, we all pay.

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  6. Eric says:

    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?

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    • Cameron says:

      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.

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      • Enter your name... says:

        Wage and salary income is also taxed twice. If you make $100, the government collects FICA (Social Security + Medicare) off the full amount and also income taxes off the full amount. So you hand over $8 for FICA, leaving you with $92, and then it says “Now hand over 20% for income taxes on the 92% that you still have—and 20% for income taxes on the $8 that you already gave me!”

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    • Steve Cebalt says:

      Hi Eric: I actually agree with your point, but a worker doesn’t TAKE $100,000 from the employer; one exchanges a big chunk of his life (time) for that money. And in this economy, I am not sure that a job is less risky than a well-diversified, conservative investment portfolio; especially for someone like me who is at risk for age discrimination i nthe current market (I’m 55). A person who loses his job may lose everything he has to sustain himself. So when you say “Investments are subject to losses that regular income is not,” I think many people who have lost good jobs during the recession in exchange for crappy part-time jobs (or no job) would have a hard time intellectualizing your point.

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  7. Alan T says:

    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?

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    • Michael says:

      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.

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      • Phil Persinger says:

        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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      • J1 says:

        Phil – Life span statistics are primarily – and infant mortality statistics are entirely – based on the definition of “live birth”, which varies wildly by country and is self reported. There is no country I’m aware of that has a broader definition of live birth than the US does, and many if not most countries have much narrower definitions that dramatically reduce their infant mortality rate (thus increasing their average life span). That doesn’t mean it’s lower when measured using the same definition, and it almost certainly isn’t. So I’m pretty sure your assertions about lifespan and infant mortality are incorrect – to take just one example, Japanese Americans have a longer lifespan (84.5 years) than Japanese Japanese (82.7 years) – but I can’t say for certain and neither can you, because the statistics to specifically support or refute your assertion don’t exist.

        I was howling with laughter at your “50% savings” remark. A government run healthcare system wouldn’t be a dime cheaper than what we have now, and it would probably cost a lot more (govt behavior with this type of program is exceptionally consistent). And instead of dealing with an insurance company I could sue in a coverage dispute, I’d be dealing with a bureaucracy with sovereign immunity. No thanks.

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      • Phil Persinger says:

        J1–

        Thank you for your thoughtful reply.

        If I have no basis for an argument based on statistics, then neither do you (as you seem to admit). Still, I’m puzzled by your cited examples of the Japanese life-span (which strikes me as a particularly misdirecting apples-to-oranges comparison) and the effects of the definition of live birth on life expectancy (for which you supply no corrective factors). Simply asserting these objections is not an automatic refutation of the standard comparisons, and in fact a CDC report

        (http://www.cdc.gov/nchs/data/databriefs/db23.htm)

        concludes that differences in infant-mortality definition do not account for the differences in the respective rates. And if one compares the US to Germany, which has the same definition of birth, the rates are 6.81 per 1000 and 3.71 per 1000, respectively, for the period 2005/2010 (http://en.wikipedia.org/wiki/List_of_countries_by_infant_mortality_rate). We come out ahead yet again, it seems.

        I’ve lived long enough to have heard a series of arguments to explain these statistical disparities: that Europe has different demographics from the US, that the US has more poor folks, etc. As one argument wears out, another argument takes it place to justify the health-care system we have here. It would help if you could show us why this particular argument wasn’t used thirty years ago when the argument was all about Europe’s not having minorities. Perhaps you never have believed this last argument, but it gives you the flavor of the height of the bar your current argument has to clear to convince the likes of me.

        And I would like to see the basis for for your assertion that an a universal health-care system in the US (which would not necessarily be government-run) would be more expensive than what we have now.
        Again, ask a Canadian– and don’t cherry-pick. Their system runs lower costs. Yes, it does:

        http://www.pbs.org/newshour/rundown/2012/10/health-costs-how-the-us-compares-with-other-countries.html

        The idea (which you may not hold) that the private sector is a priori more efficient– whatever that means– than the public sector is one of the grand internal contradictions of American political life. Either government (elected by the people) does things well or it doesn’t. But to say automatically that government can do no right is to invite the charge that one thinks private militias will do a better job at national defense than the Pentagon.

        Maybe government does some things well and not others, but I don’t see that argument coming from your side.

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      • Enter your name... says:

        The corrections for live-birth statistics are complex and not suitable to saying “take 10% off of ours”. You have to consider not just the definitions but also whether the definitions are followed consistently (not true in some countries), and the inherent risks of the pregnancies. You need to account for live births, stillbirths, the accuracy of the reports, and also at how many pregnancies have been sustained that would have ended much earlier, or even not happened in the first place, in a country with different levels of support.

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      • Phil Persinger says:

        Enter your name–

        What you write is undoubtedly true, which is why both J1 and I have discussed this issue each from our own perspective.

        But I think the introduction of this argument is a major misdirection. Where we have direct comparisons– and we do have them– the US still underperforms. And where we don’t, the CDC says the adjustments needed don’t significantly change the results: we still underperform.

        I am not a scientist, a physician or a statistician, but I trust that the CDC has a handle on all of these areas. If anyone out there knows why the CDC is not trustworthy, speak now or forever hold your peace.

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      • J1 says:

        Phil – I used the reference to Japanese lifespan because it compares a fairly homogenous ethnic group with it’s country of origin and addresses the issue of life expectancy between the US and a “single payer” country, my point being single-payer doesn’t necessarily provide better outcomes. I’m not sure why it’s misleading.

        Some other issues:

        Your remark that “(I) supply no corrective factors” sums up my argument – I don’t believe it’s possible to do so, and without those corrective factors comparisons are meaningless, thus I do believe it refutes the validity of standard comparisons.

        I would note that the CDC report cited says the US compares favorably in premature births, which require far more medical intervention than full term births, with better results than most European countries.

        On the other hand, here’s a study from the British Medical Association that flatly states that differences in reporting and registration of births “compromise the validity of international rankings of perinatal and infant mortality” http://www.bmj.com/content/344/bmj.e746 .

        My basis for the belief that a universal system in the US wouldn’t be any cheaper stems from my observation over time of our government’s inability to control the cost of benefit programs. We’d have great difficulty imposing any sort of rationing (which would be essential to controlling costs) because elected officials in the US lack the ability to act against popular will (at least on issues as contentious as this one) due to their lack of insulation from the voters. Those in parliamentary systems do have that ability (see: Europe, public opinion, death penalty). I appreciate your optimism, but I think it’s misplaced.

        Finally, yes, I do believe the private sector is a priori more efficient than the public sector. There is nothing government does that the private sector couldn’t do better and cheaper, only powers that can’t safely be delegated (police, judiciary, military etc.).

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      • Phil Persinger says:

        J1–

        Thank you for the link to the BMJ article, which I think everyone should check just to get a sense of this one narrow issue.

        While your characterization of the article’s conclusion is correct, I would direct attention to Table 3, which levels the playing field somewhat by stripping all live births under 1000g from national stats. While the US improves its standing considerably relative to lower-income countries, even here it lags behind many, if not all, higher-income European countries with some sort of universal health-care system.

        Your point, J1, about apples-to-oranges statistics is well-taken. It seems in this case, however, no matter if the data are chopped fine or chopped chunky the results are substantially the same: the US does not compare well with other countries which spend considerably less per capita on health care.

        Now, we can discuss these matters in a fractal fashion down to individual cases, but concerning the broader subject of low-weight births I want to know if trends or deficits in US health care are driving the upward trend of these numbers. Of course, the BMJ article does not address any of this; it simply presents the fact that the US reports many more of these births. Here are some of the reasons for low-birth-weight babies (beyond the simple matter of definition): maternal smoking, alcoholism, drug use, obesity, fertility therapy, malnutrition; exposure to adverse environmental conditions; simple lack of health care during pregnancy; and on and on. Slicing off the 500g babies and then the 1000g babies will improve the numbers to a degree, but doing that ignores the real cases that are being sliced off and avoids the inconvenient problem of why we have all those cases in the first place.

        We can have a debate over each of the variables above; we can debate other general medical statistics (such as life-span); we can debate the very general issues of this country’s high medical costs, the misapplication or over-use of technology, the near-absence of efficacy or outcome data on particular medical procedures or the national-defense problems inherent in our current health-care system. But the very existence of a debate over this horizon-to-horizon array of subjects is telling.

        It seems to me that if the “market” were working, we might be discussing some of these individual subjects but we certainly wouldn’t be in the situation where these subjects become interlaced as one big tangled mess– where we can too easily get diverted into ad locum details on whether US infant mortality rates are 2.24x that of Sweden or merely 1.48x.

        As others in this thread have commented or complained, health-care policy is at base political. I do not share your pessimism regarding the ability of public policy to mitigate market deficiencies and to accomplish that with less cost, more efficiency and less anguish.

        Thank you again for your thoughtful and blessedly civil comments.

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      • Oliver H says:

        J 1 -

        Your oversights in the BMJ article were already pointed out. Added to that, putting aside the issue of live births vs. stillbirth, childbed mortality in the US is also dramatically higher than in comparable nations (cf. here, for example: https://www.cia.gov/library/publications/the-world-factbook/rankorder/2223rank.html ). And I believe we can agree that a mother who was pregnant for months was alive, no?

        As for your belief in the efficiency of private endeavours, having worked in private industry, I cannot help but find the notion of its alleged inefficiency naive. Every administration, private or public, of a given size comes with inefficiencies, and the larger the administration, the larger the redundancies, communication problems and politicking that emerge. If you look at GM, they can hardly be called efficient by any reasonable definition of that word. Public administrations, especially on the national level, tend to be large – but any company juggling as many people as a whole nation would be highly unlikely to have a smaller administration.

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    • drizzl says:

      That would be a good idea for the entire industry, but would never happen for the same reason single-payer or a public option never happened. The insurance companies lobby to keep those options unavailable.

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    • Astrocramp says:

      This ignores the fact that private insurance is holding our creaky system up. No hospital or clinic could survive with reimbursement rates all at Medicare levels, private insurers reimburse at a much higher level to providers. If you set all reimbursement at Medicare levels, you will either need to increase Medicare reimbursement to providers or suffer a loss in services and provider consolidation/failures. A viable option considering ever escalating costs and boomers who will hoover up public resources, but shouldn’t be considered a problem free panacea.

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      • Enter your name... says:

        I wonder how many of these “Medicare for all” people have ever attempted to find a geriatrician who will accept a Medicare-only patient.

        It’s impossible in my area, because unfairly low reimbursement rates due to an improper geographic classification. (Medicare, under pressure from the parts of the designated area that are unfairly benefiting from our tenth-most-expensive-in-the-nation local economic situation, was ordered to fix this several years ago, but Medicare is simply refusing to follow the law.) There simply are zero geriatricians willing to take new patients in my county.

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  8. Paul says:

    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.

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    • Eric says:

      Hidden due to low comment rating. Click here to see.

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      • Dan says:

        @Eric, I don’t think you understand what the sunk cost fallacy is, or US tax regulations. If you found $1mm in a hole in the ground the IRS would consider it income and tax you on it.

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    • Patrick Mullin says:

      For people to not understand the reasons why an invested income isn’t taxed at an earned income tax, just continues to amaze me. Trying to debate it with some people when they say investment income should be taxed higher than earned income makes me die a little inside at how little people don’t know about money.

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      • Impossibly Stupid says:

        It’s not a question of economics, it’s a question of politics. The Republican party tries to fly the flag of “hard working, REAL Americans”, but that is exactly the opposite of what investment income represents. People earning significant income from their investments are privileged, already-wealthy people. More to the point, the investments only produce real income when they pay for someone to *work* in order to generate the profit. You can’t pretend to represent both classes of people fairly; that way lies insanity, which is causing Republicans to die more than a little inside.

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