PJ Media

Truth in Taxes — Don’t Call It a 'Medicare' Tax

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.

In 1993, the Clinton administration removed the cap, making the tax applicable to all earned income without limitation — converting it into an unlimited 2.9 percent earned income tax. The administration argued it was only “fair” that each person pay the tax on all his or her earned income — not just some of it. But since the additional tax payment did not bring any additional Medicare benefits, the move broke the connection between the tax and the benefit received for it, and turned it into simply an add-on tax on earned income.

Periodically, commentators assert that the tax should be on all income, not just earned income — it’s not “fair” that people with investment income are spared the tax. But the real point is that the “Medicare” tax was supposed to be tied to (and limited by) the benefits received, and thus is already way too high.

The Obama administration, by extending the tax to all income and raising the rate, would complete the transformation of the Medicare tax into an “open door” for “significantly more revenues” for the government — funding not Medicare, but rather legislation that dramatically reduces Medicare benefits and creates an entitlement for a different group of citizens.

From a policy standpoint, this is incoherent — but there is an obvious attraction to creating a vehicle for “significantly more revenues” that will automatically expand in the future based on income, rather than health benefits — and then calling the vehicle a “Medicare” tax. Moreover, if the government were to call it by its proper name — an increased and expanded income tax — it would be harder not only to pass it but, even more importantly, harder later this year to impose still another new massive income tax (to be disingenuously called merely letting the Bush tax rates “expire”).

No wonder all this is not being put on C-SPAN. It is best done in private, and then rushed to a vote without adequate time for public discussion and debate, with a bill that will barely be in print by the time the people’s representatives are required to vote on it.