Fiscal Fact No. 219
The health care bill passed by the House of Represenatives on Sunday (Senate bill plus reconciliation) includes, among many other 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. increases, two tax hikes on high-income taxpayers set to go into effect in 2013. One of the increases is a higher employee Medicare tax on wages earned above $250,000 (married; $200,000 for singles). The other tax hike is a 3.8 percent Medicare tax on investment income earned by couples earning more than $250,000 in modified adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” ($200,000 for singles). Investment income includes such sources as rental income, dividend income, interest income, income from trusts, and most capital gains.
In this short Tax Foundation Fiscal Fact, we present eight examples of the tax hikes that various high-income taxpayers would face under the bill.
We should point out two other important facts before delving into the hypothetical examples:
(1) These are not the only tax provisions in the health care bill.
(2) The thresholds cited above ($250,000 for couples and $200,000 for singles) are not indexed for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. 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. (And note that it’s $200,000 in 2013, which, assuming some reasonable rate of inflation (2% per year), would be equivalent to an income of about $188,000 in 2010.)
Scenario 1: Single taxpayer earning $200,100 in wages
Current Medicare tax (employer portion): $2,901.45
Current Medicare tax (employee portion): $2,901.45
New Medicare tax (employer portion): $2,901.45
New Medicare tax (employee portion): $2,902.35
New Medicare Unearned Income tax:$0
Current Medicare total tax: $5,802.90
New Medicare total tax: $5,803.80
Medicare tax increase: $0.90
Scenario 2: Married taxpayer earning $250,100 in wages
Current Medicare tax (employer portion): $3,626.45
Current Medicare tax (employee portion): $3,626.45
New Medicare tax (employer portion): $3,626.45
New Medicare tax (employee portion): $3,627.35
New Medicare Unearned Income tax: $0
Current Medicare total tax: $7,252.90
New Medicare total tax: $7,253.80
Medicare tax increase: $0.90
Scenario 3: Single taxpayer earning $300,000 in wages
Current Medicare tax (employer portion): $4,350
Current Medicare tax (employee portion): $4,350
New Medicare tax (employer portion): $4,350
New Medicare tax (employee portion): $5,250
New Medicare Unearned Income tax: $0
Current Medicare total tax: $8,700
New Medicare total tax: $9,600
Medicare tax increase: $900
Scenario 4: Married taxpayer earning $350,000 in wages
Current Medicare tax (employer portion): $5,075
Current Medicare tax (employee portion): $5,075
New Medicare tax (employer portion): $5,075
New Medicare tax (employee portion): $5,975
New Medicare Unearned Income tax: $0
Current Medicare total tax: $10,150
New Medicare total tax: $11,050
Medicare tax increase: $900
Scenario 5: Single taxpayer earning $180,000 in wages and $40,000 in investment income
Current Medicare tax (employer portion): $2,610
Current Medicare tax (employee portion): $2,610
New Medicare tax (employer portion): $2,610
New Medicare tax (employee portion): $2,610
New Medicare Unearned Income tax: $760
Current Medicare total tax: $5,220
New Medicare total tax: $5,980
Medicare tax increase: $760
Scenario 6: Married taxpayer earning $180,000 in wages and $75,000 in investment income
Current Medicare tax (employer portion): $2,610
Current Medicare tax (employee portion): $2,610
New Medicare tax (employer portion): $2,610
New Medicare tax (employee portion): $2,610
New Medicare Unearned Income tax: $190
Current Medicare total tax: $5,220
New Medicare total tax: $5,410
Medicare tax increase: $190
Scenario 7: Married taxpayer earning $370,000 in wages and $1.5 million in investment income
Current Medicare tax (employer portion): $5,365
Current Medicare tax (employee portion): $5,365
New Medicare tax (employer portion): $5,365
New Medicare tax (employee portion): $6,445
New Medicare Unearned Income tax: $57,000
Current Medicare total tax: $10.730
New Medicare total tax: $68,810
Medicare tax increase: $58,080
Scenario 8: Married taxpayer earning $5 million in investment income
Current Medicare tax (employer portion): $0
Current Medicare tax (employee portion): $0
New Medicare tax (employer portion): $0
New Medicare tax (employee portion): $0
New Medicare Unearned Income tax: $180,500
Current Medicare total tax: $0
New Medicare total tax: $180,500
Medicare tax increase: $180,500
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