Politico reported earlier this week on the “unusual day-long negotiating session” at the White House between President Obama and top Democratic congressional leaders — an eight-hour “de facto conference committee” held in private. Those involved in the talks “sought to keep details of their progress under wraps,” but:
Boosting the Medicare payroll tax — either by increasing the rate or extending it to unearned income — is still a live option, according to sources familiar with the talks.
The tax would open the door to significantly more revenues, according to Joint Committee on Taxation.
The next day, after a long meeting with union representatives, there was an announcement that Obama had agreed to modifications to the “Cadillac tax” on health care plans, producing what Jennifer Rubin has called the “Collective Bargaining Kickback” — a special exemption until 2018 for union plans. Added to the Cornhusker Kickback for Nebraska and the various other special deals that will probably remain unknown until after the bill is finally in print (a day or two before the vote), the Collective Bargaining Kickback will require the administration to find another $60 billion in more revenues. So the Medicare payroll tax changes are probably not only still alive but perhaps even more likely.
It is thus important to recognize that what is being discussed in private is the conversion of the Medicare tax from a payment for Medicare benefits into an unlimited add-on tax on all income — a move presenting significant policy issues inadequately understood by the public. It represents another potential major shift not simply in Medicare policy but tax policy as well, slipped under the radar in private negotiations and simply announced thereafter.
In order to understand what is at stake, it is necessary to review briefly the history of the Medicare tax.
The tax was originally one bearing a direct relationship to the Medicare benefits to be received by the taxpayer. The tax was intended as a yearly premium-equivalent for old-age medical insurance — a payment made each year by workers and their employers that would pay for the medical insurance to be received at age 65. Since each person would eventually receive the same Medicare benefits, each person paid the same maximum Medicare tax each year.
When the Clinton administration came into office, the Medicare tax was 1.45 percent on the employer and 1.45 percent on the employee (2.9 percent on self-employed persons) on the first $135,000 of earned income. The maximum tax was thus capped at $3,915 per year — the annual maximum “premium” for the medical insurance to be received in the future. The cap on the income subject to the tax made the tax function as a payment for Medicare insurance, not an income tax.