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Repealing Affordable Care Act Taxes on Upper-Income Workers and Savers

By: Stephen J. Entin

The House Republican proposal to repeal and replace the Affordable Care Act would eliminate several taxes imposed under the Act. Among these is the Net Investment Income TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. that imposes a 3.8 percent surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. on income from investments. It applies to investment income of married couples with more than $250,000 of adjusted gross income, and single filers with more than $200,000 of adjusted gross income. This tax, in effect, extended the Medicare portion of the payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. to investment earnings for the first time. Critics complain that the repeal would benefit the rich, and cost the Treasury substantial revenue. They are looking only at the static “distribution tables” and ignoring the widespread economic benefits of repeal.

The Net Investment Income Tax is a bad tax, and its repeal will benefit everyone. The high tax rate on individual saving retards capital formation, which depresses productivity and wages. We estimate a “static” revenue loss from repeal at $628 billion over ten years, assuming no gain in GDP from the lower tax rate. On a static basis, that gain would fall only on individuals in the top 20% of the income distribution. But factoring in the “dynamic” growth effects of the repeal tells a different story. Repeal would raise employment by 133,000. The economy would be 0.7 percent larger, and wages about 0.6 percent larger. The income gains would be spread over all income levels. After-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize after-tax income. s in the bottom 80% of the income distribution would be about 0.65% higher than with the tax in place. They would share in the gains. The revenue cost would drop to about $444 billion, about 30% less than in the static estimate.

The repeal plan would also eliminate the 0.9 percent Medicare Hospital Insurance surtax on incomes above $250,000, which boosts the 2.9 percent HI tax to 3.8 percent. That tax also falls mainly on the rich. However, it discourages hours worked by high-income people, reduces the output of their businesses, and acts in part as a drag on earnings of their coworkers and employees. Its repeal, too, would benefit a wider group of income earners than is shown in the static distribution tables.