A new way to pay…for Reform

Over the past few months I have been musing about how to pay for reform in a way that as effective and fair as possible given our messy world. The one option that kept coming up in my mind was extending the employee portion of the Medicare Part A payroll tax to non-wage income like capital gains.

In other words, why don’t we make sure everyone helps pay for Medicare…including those who primarily make a living off of capital gains? Well, I thought this idea was novel, since it was not covered in the CBO’s list of 115 health care reform options, but Merrill Goozner got the drop on me today with his post A Tale of Two Taxes. According to Mr. Goozner, this option would raise $500 billion over the next ten years.

This money could be used to not only shore up the Part A trust fund, which is now running at a deficit, but it would allow general revenue earmarked for Medicare to go toward other uses, like covering the uninsured, expanding Medicaid, and investing in an Independent Medicare Advisory Committee. In essence, this amount, coupled with other Medicare cuts, would pay for the reform efforts currently under consideration.

The economist in me is wary of new taxes but there is definitely a case that can be made that individuals who get more of a share of their income from investments should pay their fair share. Remember, as of the 90s, the Medicare payroll tax was uncapped so that it applies to all wage income – why not non-wage income as well?

Conversely, two arguments are often made to keep capital gains taxes low. The first is the issue of double-taxation, which has almost a birther following. This argument states that since corporations pay taxes, that by taxing the proceeds from investments, individuals are, in essence, paying a double-tax. Well, that is true and it is not true. Corporations don’t really pay taxes, they just build them into their model and pass the costs down to employees and customers.

The other argument, which has a lot more traction with me, is that an increase in the capital gains tax may negatively affect total tax revenue (see graphic). That is true, to a point. That is why this expansion in the Medicare payroll tax to non-wage income should only include the 1.45 percent employee contribution, which would leave the rate of 16.45 still significantly less than the rate that existed during our best two periods of capital gains revenue. 

Personally, we have got to find a way to front the money needed for reform. I can think of no better way to do this than extending the employee portion of the Medicare payroll tax to non-wage income. It is relatively simple, it increases the fairness of the tax system, and most importantly, it would fund necessary investments in our health delivery system.  ~BAA