Obama Plans ‘Backdoor’ Tax to Pay for Health Plan

March 12, 2010 01:19

By: Dan Weil via Moneynews

A stealth provision in President Obama’s latest healthcare proposal dramatically increases taxes on the wealthy — extending Medicare taxes for the first time to “unearned” investment income.

The new 2.9 percent tax would apply to interest, dividend, annuity, royalty, and rent payments.

Under current law, Medicare payments come from salaries alone.

But Obama wants a Medicare tax to be paid on the investment income accrued by individuals making more than $200,000 a year and couples making more than $250,000.

The plan doesn’t make it clear if capital-gains income is subject to the 2.9 percent tax. If it is, the wealthy would face a capital-gains tax rate of 22.9 percent. That’s because the rate already is slated to increase to 20 percent next year from 15 percent currently.

In addition, households with income above $250,000 would see another 0.9 percent added to their Medicare tax on their normal working income. It would put their rate at 2.35 percent.

The new healthcare overhaul is expected to cost $950 billion.

Obama and congressional Democrats are under pressure to prove they can pay for it without adding to the country’s debt. Yet, they also must appear not to raise taxes — at least not on likely Democratic voters.

The tax idea is a split of sorts: Senate Democrats want to tax generous, so-called “Cadillac,” health plans, the kind often held by unionized workers. House Democrats want to tax the wealthy instead.

Meanwhile, Obama at a recent town-hall meeting plainly stated that healthcare reform would be “easy” to pay for — simply by raising the income limit on the Medicare tax.

The new proposal would radically change the nature of the tax, too. It is now at a flat rate so that everyone pays into the system at the same rate and then receives equivalent levels of medical benefits in old age.

The moves allow Democrats to raise taxes on the wealthy without calling it an income-tax increase, since in theory investment earnings are not “income” the same as a paycheck from an employer.

The Democrats’ tactics leave experts of all political stripes uneasy.

“You can certainly make the argument that (payroll is) really not appropriate anymore, and we may as well tax all income,” Howard Gleckman, a senior research associate at the liberal Urban Institute, told Fortune magazine.

“But this is kind of a back-door way to do it.”

The Obama administration says a tax on unearned income makes sense because people who live off their dividend and interest income should see that money treated as wages.

But Gleckman challenges that idea.

“Usually we have tax brackets rather than this cliff, where suddenly if you make a dollar more you’re subject to this additional tax,” he said.

The liberal Center for Tax Justice says the new taxes would affect 2.3 percent of taxpayers in 2014.

But the change would put a huge part of the burden for financing healthcare reform on the backs of the wealthy.

The non-partisan Joint Committee on Taxation estimates that the proposal would create $183.6 billion in revenue during the next 10 years. That would account for 44 percent of the total amount needed to pay for healthcare reform.

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