You are here

Eliminating Two ACA Medicare Taxes Means Very Large Tax Cuts for High Earners and the Wealthy

UPDATED
January 11, 2017
Figure 1
Millionaires Would Get 80% of Tax Cut From Ending Health Reform's Two Medicare Taxes

A repeal of the Affordable Care Act (ACA) similar to the reconciliation measure that President Obama vetoed in January 2016 would immediately eliminate two Medicare taxes that fall only on high-income filers: the additional Hospital Insurance tax on high earners and the Medicare tax on unearned income.[1]  High-income taxpayers would no longer face Medicare taxes on all their income — unlike low- and moderate-income earners — and the disparity between the top tax rates on income from earnings and income from wealth would widen further.  

Millionaires would be the overwhelming beneficiaries of repealing these two taxes.  (See Figure 1.)  The Urban-Brookings Tax Policy Center (TPC) estimates that in 2017:

  • Millionaire households would get tax cuts of $49,370 apiece (2.2 percent of after-tax income), on average.  (See Figure 2.)  (Such households’ incomes average $2.2 million in 2017.)[2]  Their tax cuts would be larger than the average total incomes of nearly the bottom half of households.

     

    Figure 2
    Eliminating Two Health Reform Medicare Taxes Helps Only High-Income Filers

     

  • Millionaires would reap a full 80 percent of the tax cut from repealing these two provisions.     
  • Multi-millionaires would benefit even more.  The top 0.1 percent of filers — those with incomes above $3.8 million (and incomes averaging about $7.5 million) — would receive tax cuts of more than $195,000 apiece on average.[3]

The repeal of these two taxes represents the overwhelming bulk of the total tax cuts for millionaires from repealing the ACA, which average about $50,000 apiece.

Impact of Repealing Additional Medicare Payroll Tax on High Earners

Only individuals with earnings over $200,000 — or $250,000 for couples — face the 0.9 percent tax on their earnings above those amounts, which raises their employee share of their Medicare tax rate on earnings from 1.45 to 2.35 percent.  These revenues are deposited in the Medicare Hospital Insurance (HI) trust fund, so repealing the tax would reduce high earners’ contributions to Medicare.[4]

Repealing this tax would cut taxes for millionaires by more than $10,000 apiece on average in 2017 (about 0.5 percent of their after-tax income), TPC estimates.  

CBO estimates that repealing the 0.9 percent contribution would reduce revenues by $123 billion over 2016 to 2025.The Congressional Budget Office (CBO) estimates that repealing the 0.9 percent contribution would reduce revenues by $123 billion over 2016 to 2025.[5]  Without a replacement revenue source, this would accelerate the exhaustion of the HI trust fund by four years, from 2028 to 2024, Loren Adler and Paul Ginsburg of the Center for Health Policy at the Brookings Institution and the Schaeffer Center for Health Policy and Economics estimate.[6] 

The ACA repeal bill that President Obama vetoed in January 2016 included no replacement source of revenue, although it would have made a one-time transfer of general revenues to the HI trust fund to offset part of the fund’s income loss. 

Impact of Repealing Medicare Tax on Unearned Income

Before health reform, Medicare taxes applied only to wage and salary and self-employment income; they did not apply to unearned income from wealth such as capital gains, dividends, taxable interest, and royalties.  For low- and moderate-income working families, which have little in the way of unearned income, this meant that Medicare taxes applied to virtually all of their income.  In contrast, the wealthiest taxpayers owed no Medicare taxes on the unearned income derived from their wealth — a significant share of their income.[7]  

The ACA addressed this inequity by ensuring that individuals with incomes above $200,000 and couples with incomes above $250,000 would face a 3.8 percent tax rate on their net investment income above those levels.[8]  The 3.8 percent rate is equal to the 2.9 percent combined employee and employer Medicare payroll tax rate faced by all earners, plus the 0.9 percent high-earner Medicare rate on wage and salary income.  The tax is referred to as the “unearned income Medicare contribution” or the “net investment income tax.”  The revenues are not deposited directly in a Medicare trust fund, although President Obama has proposed to do so.[9]

Repealing this provision would increase the gap between the tax rates that middle-income workers face on their earnings and those that the wealthy face on their investment income (see box, below).  As before the ACA, middle-income filers would face Medicare taxes on all their income, while wealthy filers would face no Medicare taxes on their large income from wealth.  

The unearned income Medicare contribution tax also somewhat improves economic efficiency.  The current gap between the overall tax rate applied to ordinary income and the much lower rate applied to capital gains encourages inefficient tax-sheltering activities; it creates large tax incentives for wealthy individuals to engage in financial engineering schemes to convert ordinary income into capital gains.  By modestly reducing the differential between the tax rates on ordinary income and capital gains, the ACA’s unearned income contribution takes a step toward reducing these tax-shelter incentives.  Eliminating the tax would increase this distortion and make tax sheltering more attractive.

Republican lawmakers have made repealing this tax a priority: the House GOP “Better Way” tax blueprint and President-elect Trump’s tax reform plan both repeal it while delivering large tax cuts to the wealthiest filers overall, and the 2016 reconciliation bill that President Obama vetoed also eliminated the tax.

The benefit of eliminating the unearned income Medicare contribution tax would be extremely tilted to the highest-income and wealthiest individuals, given the concentration of wealth among the highest-income filers.  In 2017, millionaire households would receive a tax cut averaging $39,040 apiece (1.7 percent of after-tax income), TPC estimates show.[10]  Millionaires would receive a full 85 percent of the tax cut.[11]

CBO estimates that eliminating this provision alone would cost $223 billion over 2016 to 2025.[12]

Repealing the Two ACA Medicare Taxes Would Increase Disparities Between Highest-Income Filers and Middle-Income Earners

A middle-income family whose income comes entirely from wages currently faces the full 2.9 percent Medicare tax, and would continue to do so if the two ACA Medicare taxes are repealed because the taxes do not affect households with incomes below $200,000 per individual or $250,000 per couple. 

But while capital gains, dividends, and taxable interest account for only a tiny share of the income of low- and middle-income families, a millionaire household is much more likely to have a significant share of its income from “unearned” income from investments, such as capital gains, dividends, and taxable interest.a  As an illustrative example, consider a couple making $10 million a year that receives half of its income from capital gains, dividends, and taxable interest and the other half from earnings.  Under the ACA Medicare tax provisions, the couple currently faces Medicare taxes totaling about 3.8 percent of their income, regardless of whether the income comes from wages or investments.  The 3.8 percent rate they face from these taxes is modestly higher than the 2.9 percent rate faced by a middle-income couple making $50,000.b  

If the ACA Medicare taxes were repealed, however, the middle-income family would continue to face a Medicare tax rate of 2.9 percent, while the multi-millionaire couple would pay only 1.5 percent of its income in Medicare tax, reinstating a significant disparity between low-and middle-income wage earners and wealthy households at the top.

a Net capital gains, dividends, and taxable interest made up an average of 59 percent of the income of people who make more than $10 million in 2014.  By contrast, these sources of income only made up about 3 percent of the income of people who made between $50,000 and $75,000.  (Source: CBPP calculations from IRS 2014 Statistics of Income Table 1.4, https://www.irs.gov/pub/irs-soi/14in14ar.xls).

b The rate would be lower than 3.8 percent if part of the couple’s $10 million income consisted of active Subchapter S corporation income, which is exempt from Medicare tax.

While Wealthy Benefit, Millions Stand to Lose Health Care  

At the same time that repealing the two ACA Medicare taxes would shower immediate, huge tax cuts on millionaires, Republicans’ plans for ACA “repeal and delay,” along with broader tax reform, would threaten existing coverage for millions of low- and moderate-income families.

  • Millions of Americans would lose health coverage.  House Republicans’ approach to repealing the ACA would throw the individual health insurance market into disarray and cause 4.3 million more people to become uninsured in 2017, a recent Urban Institute analysis estimates.  Repeal would also create uncertainty about future health security for tens of millions more. By 2019, repeal would leave nearly 30 million more Americans uninsured, more than doubling the number of uninsured under current law.[13]
  • Medicaid and Medicare would be put at risk.  Repealing these two Medicare taxes alone would cost $346 billion in lost revenue over 2016 to 2025, CBO estimates. [14]  Along with the revenues lost from repealing other ACA taxes, such as fees on drug companies and insurers, this leaves inadequate resources for Republicans’ promised — but as yet unspecified — ACA replacement.  That puts Medicaid and Medicare at risk of cuts to help finance the GOP replacement package, and tens of millions more Americans at risk of increased health and financial hardship.[15]
  • Millionaires would receive even greater tax cuts.  Republicans plan to move a broader tax package this year, and the tax proposals from the House GOP and President-elect Trump include large, additional net tax cuts for the most well-off.[16]  These include top-tilted proposals such as slashing the top business and individual income tax rates and repealing the estate tax.

End Notes

[1] For the overall impact of the repeal of the ACA tax provisions, see Chye-Ching Huang and Paul Van de Water, “Millionaires the Big Winners From Repealing the Affordable Care Act, New Data Show,” Center on Budget and Policy Priorities, December 15, 2016, http://www.cbpp.org/research/federal-tax/millionaires-the-big-winners-from-repealing-the-affordable-care-act-new-data.

[2] TPC Tables T16-0301 and T16-0309.

[3] TPC Tables T16-0310, T16-0302, and T16-0267

[4] For more, see Chuck Marr, “Change in Medicare Tax on High-Income People Represent Sound Additions to Health Reform,” Center on Budget and Policy Priorities, March 5, 2010, http://www.cbpp.org/research/changes-in-medicare-tax-on-high-income-people-represent-sound-additions-to-health-reform.

[5] CBO’s estimate of the 2016 GOP reconciliation bill to repeal the ACA: CBO, “Estimate of Direct Spending and Revenue Effects of H.R.3762,” January 4, 2016, https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/costestimate/hr3762followingenactmentofconsolidatedappropsactof2016.pdf.

[6] Loren Adler and Paul Ginsburg, “Paying for an ACA replacement becomes near impossible if the law’s tax increases are repealed,” Brookings Institution, December 19, 2016, https://www.brookings.edu/blog/up-front/2016/12/19/paying-for-an-aca-replacement-becomes-near-impossible-if-the-laws-tax-increases-are-repealed/.

[7] In 2014, taxpayers with adjusted gross incomes above $1 million derived about 40 percent of their income from net capital gains, dividends, and taxable interest income; they received more than half of all income from these sources in 2014.  Taxpayers with incomes above $10 million received an average of 56 percent of their income from capital gains, dividends, and taxable interest income.  By contrast, these sources only made up about 3 percent of the income of people who made between $50,000 and $75,000.  IRS Statistics of Income, Individual Statistical Tables by Size of Adjusted Gross Income, Table 1.4, https://www.irs.gov/uac/soi-tax-stats-individual-statistical-tables-by-size-of-adjusted-gross-income.

[8] See Mark Keightley, “The 3.8% Medicare Contribution Tax on Unearned Income, Including Real Estate Transactions,” Congressional Research Service, May 18, 2012, https://www.everycrsreport.com/reports/R41413.html for a detailed description of the calculation of the 3.8 percent surtax. 

[9]  President’s Fiscal Year 2017 Budget Analytical Perspectives, p.386, https://www.whitehouse.gov/sites/default/files/omb/budget/fy2017/assets/ap_26_funds.pdf.

[10] TPC Table T16-0309.

[11]TPC Table T16-0309.

[12] CBO, 2016.

[13] Linda Blumberg, Matthew Buettgens, and John Holahan, “Implications of Partial Repeal of the ACA Through Reconciliation,” Urban Institute, December 6, 2016, http://www.urban.org/research/publication/implications-partial-repeal-aca-through-reconciliation.

[14] CBO, 2016.  

[15] Jacob Leibenluft and Edwin Park, “ACA Repeal Would Leave Inadequate Resources for Replacement and Put Medicaid and Medicare at Risk,” Center on Budget and Policy Priorities, December 20, 2016, http://www.cbpp.org/research/health/aca-repeal-would-leave-inadequate-resources-for-replacement-and-put-medicaid-and.

[16] See Chuck Marr and Chye-Ching Huang, “House GOP ‘A Better Way’ Tax Cuts Would Overwhelmingly Benefit Top 1 Percent While Sharply Expanding Deficits,” Center on Budget and Policy Priorities, September 16, 2016, http://www.cbpp.org/research/federal-tax/house-gop-a-better-way-tax-cuts-would-overwhelmingly-benefit-top-1-percent and Robert Greenstein, Chye-Ching Huang, and Isaac Shapiro, “Revised Trump Tax Plan Heavily Tilted Toward Wealthiest, Tax Policy Center Analysis Shows,” Center on Budget and Policy Priorities, October 11, 2016,  http://www.cbpp.org/research/federal-tax/revised-trump-tax-plan-heavily-tilted-toward-wealthiest-tax-policy-center.