Tax policy is an area in which two people can look at the exact same set of facts and come to exactly opposite conclusions. Take the American Enterprise Institute's latest assault on the Medicare tax reform that President Obama has included in his health care reform plan.
The President has adopted an idea that CTJ has championed for months, to change the Medicare tax so that it no longer exempts investment income and to make the tax more progressive. The President would raise the Medicare tax rate for earnings exceeding $200,000 for unmarried taxpayers and $250,000 for married taxpayers, and he would apply the existing 2.9 percent Medicare tax to investment income for those with adjusted gross income (AGI) above $200,000/$250,000.
CTJ's recent report on this proposal found that only 2.3 percent of taxpayers would be affected by this tax in 2014. (The tax would go into effect in 2013).
But that's no comfort to Alan D. Viard and Amy Roden, who argue against this tax reform in AEI's online journal. They write:
"Of course, the high-income cutoffs mean that the new Medicare tax wouldn’t apply to most American savers. But the savers hit by the tax are precisely the ones who provide the largest volume of funds to finance investment in our economy. In 2007, tax returns from households with incomes greater than $200,000 reported 47 percent of all interest income, 60 percent of all dividends, and a staggering 84 percent of all net capital gains. We can’t afford to discourage this group from investing in America’s future."
So they fully agree with us that the sort of income they don't want Congress to tax predominately flows to the rich.
As a judge would say, the facts in this case are not in dispute.
What is in dispute is whether we have to avoid taxing the types of income that mostly flow to the wealthy in order to keep our economy running smoothly. AEI says yes, we need to have preferential rates in some taxes for these types of incomes (like the capital gains and dividends break in the income tax) and wholesale exemptions in other taxes (like the Medicare tax).
We disagree. We have seen no evidence that the economy functions better when taxes on investment income are slashed or eliminated. Even when it comes to capital gains, which is where libertarians think they have their strongest case, there is no evidence that tax cuts have enhanced economic efficiency. Capital gains income certainly has fluctuated as a result of the ups and downs in the overall economy, and libertarians often attribute the upswings to tax cuts for capital gains. Sadly for them, capital gains realizations have, throughout the Bush years and today, been lower than they were at the end of the Clinton years, when the top rate for capital gains was higher.
Taxing investment income the same way that income from work is taxed is only fair. The President's Medicare tax reform is a step in the right direction. It would end the current exemption in the Medicare tax for investment income to help finance a health care reform that really will help our economy to function more efficiently.
Recent News about Health
A new report from Citizens for Tax Justice examines the Medicare tax reform included in the health care plan recently put forward by President Obama. The report concludes that this reform would affect only 2.3 percent of taxpayers in 2014. The richest one percent would pay about 84 percent of the resulting tax increase, and the richest five percent would pay virtually all of the tax increase.
The report also discusses one flaw in the President's proposal: It would preserve what is often called the "John Edwards loophole," which is a scheme that some wealthy owners of "S corporations" use to avoid the Medicare tax.
On Monday, the White House released its health care reform proposal, bringing together the elements of the health bills already approved by the House and Senate. The proposal is the result of months of negotiations between Democratic leaders in the House and Senate and is an attempt by the President to nudge the chambers along towards agreement.
One of the disagreements between the House and Senate has been over how to finance the reform. Both chambers would rely partly on savings from within existing government health programs and partly on new revenue measures. The largest revenue-raiser in the House version is a high-income surcharge on millionaires, while the largest revenue-raiser in the Senate version is an excise tax of 40 percent on insurance companies for each high-cost benefits plan they provide.
Analyses from CTJ concluded that the House surcharge is very progressive and, despite claims to the contrary, would have no noticeable impact on small businesses. The Senate's excise tax, on the other hand, would impose costs that would be passed on to many middle-income families, and would make the overall tax system less progressive than it is now.
Before the Senate approved its bill on Christmas Eve, the excise tax was softened somewhat, and another revenue-raiser was added: an increase in the Medicare tax by 0.9 percent for wages in excess of $200,000 for unmarried taxpayers and $250,000 for married couples. While this made the bill more progressive overall, there were still rumblings, particularly in the House, about the potential impact of the excise tax for high-cost health insurance plans.
President Obama's Proposal
The President's proposal has resolved this issue to a significant degree by further softening the excise tax for high-cost health insurance and adding another element to the Medicare tax. The Medicare tax would now apply to investment income, which is currently exempt.
In other words, the Medicare tax would be expanded in two ways. First, an additional 0.9 percent would apply to wages in excess of $200,000 for unmarried taxpayers and $250,000 for married couples. Second, the existing 2.9 percent Medicare tax would apply to investment income for the first time (but only for taxpayers with adjusted gross income above $200,000/$250,000).
Citizens for Tax Justice is currently working to produce estimates of the impact of this change, but given that only the richest two percent have incomes over the $200,000/$250,000 threshold, this is obviously a tax increase that does not affect low- or middle-income people at all.
Why the Medicare Tax Needs to Be Reformed
Starting in May of last year, Citizens for Tax Justice worked with a broad coalition of policy advocates, think-tanks, faith-based groups and labor unions to bring progressive financing options like this to the attention of members of Congress. Early on, CTJ pointed out that while lawmakers scrambled to find revenue to finance health care reform, they were ignoring a huge hole in the one large tax we already have to finance health care.
The Medicare payroll tax is a 2.9 percent tax on earnings, half of which is nominally paid by employers while the other half is nominally paid by workers. (Economists agree that workers ultimately pay the employer half as well, in the form of reduced wages or benefits.) We noted that this existing tax for health care completely exempts people who live off of investment income.
Imagine someone who does not have to work because he or she collects capital gains, stock dividends, interest, rents, royalties, or others type of investment income. This individual does not have to pay any payroll tax (Medicare tax or Social Security tax) on this income. Eligibility for Medicare is still possible upon reaching age 65 as long as he or she worked (and thus paid the Medicare payroll tax on earnings) for about ten years at some point in the past.
By the time she reaches age 65, even Paris Hilton may have appeared on television and in other venues enough to have worked a full ten years (and thus be eligible for Medicare). But something tells us that there will be a whole lot of years when she did not work and didn't have to pay a cent towards Medicare. Under the President's proposal, everyone will contribute towards the health of the nation, and the tax system will be fairer overall.
At the start of World War II, the British government designed a poster with the words "Keep Calm and Carry On," to motivate the public during trying times. Perhaps they'd be getting this poster out again if a minority of their non-representational House of Lords found a way to halt any and all legislation during a health care crisis. Fortunately for the clear-thinking Brits, they decided long-ago that having a simple majority of elected legislators approve a bill was a sensible and democratic way to legislate. 
On our side of the pond, Senate Republicans voted in lockstep against the health care bill approved by the chamber on Christmas Eve. It will be difficult to pass another health care bill in the Senate. Under the chamber's current rules, the Republicans only need 41 votes to filibuster a bill, and they appear to have obtained that 41st vote with the election of Scott Brown as the new U.S. Senator from Massachusetts.
The House, which had already passed a bill that most advocates find superior, may not have the votes to pass the Senate bill as it is, according to Speaker Nancy Pelosi. Of course, that's presumably because the Senate bill does not do as much to make health care affordable and because the Senate's main revenue-raiser is an excise tax on insurance companies offering high-cost benefit plans, which is less progressive than the high-income surcharge in the House bill.
There is a simple way around this logjam. The House and Senate seemed to be on the brink of agreeing to a final health care bill. Whatever changes would be needed to make the Senate bill look more like that final agreement can probably be passed through the "budget reconciliation" process.
That's the process that the Senate uses from time to time to pass legislation by majority vote (meaning 51 votes are needed instead of 60). One would think that all legislation would be passed this way. The reconciliation process was originally created in the 1970s to fast-track bills that would help balance the budget, but since then has been used for all sorts of legislation. (President Bush and the Republican-led Congress used it to cut taxes and increase the budget deficit.)
Reconciliation can only be used to pass legislation that has a quantifiable budgetary impact, and many parts of health care reform might not meet that standard. But Congress does not have to pass an entire health care bill using reconciliation. It could just use reconciliation to pass those changes that are needed to make the Senate bill look more like the final bill that the Democratic leadership has been negotiating. And these changes, according to our sources, would meet the standard of having a budgetary impact.
So, the Senate could pass a reconciliation bill to improve the original bill they passed on Christmas Eve, and then the House could pass the original Senate bill and the reconciliation bill almost simultaneously.
Some Senators have historically been hostile to reconciliation, claiming that it's unfair to change the rules to pass legislation. This argument is incoherent and bizarre. We are quite confident that passing a law with a majority vote in the House, a majority vote in the Senate, and the President's signature (that's approval from three separately elected institutions) is a sufficiently democratic process that no one should feel that their rights have been trampled.
The Senate Budget Committee chairman, Kent Conrad, a traditional foe of reconciliation, seems to agree with us now.
The path ahead is clear. Keep calm and carry on.
In May of last year, Citizens for Tax Justice proposed several progressive options to raise revenue to finance health care reform. Our favorite idea was to close a gap in the one big tax for health care that we already have, the Medicare payroll tax. The Medicare payroll tax is a 2.9 percent tax on earnings, half of which is nominally paid by employers while the other half is nominally paid by workers. (Economists agree that workers ultimately pay the employer half as well, in the form of reduced wages or benefits.) We noted that this existing tax for health care completely exempts people who live off of investment income.
Imagine someone who does not have to work because he or she collects capital gains, stock dividends, interest, rents, royalties, S corporation income or some other type of investment income. This individual does not have to pay any payroll tax (Medicare tax or Social Security tax) on this income. Eligibility for Medicare is still possible upon reaching age 65 as long as he or she worked (and thus paid the Medicare payroll tax on earnings) for about ten years at some point in the past.
By the time she reaches age 65, even Paris Hilton may have appeared on television and in other venues enough to have worked a full ten years (and thus be eligible for Medicare). But something tells us that there will be a whole lot of years when she did not work and didn't have to pay a cent towards Medicare.
CTJ's Proposal to Reform the Medicare Tax
Our initial proposal was to make the individual portion of the Medicare tax (the 1.45 percent nominally paid by workers) apply to investment income as well as wages, and then introduce a second, higher rate for singles with income over $200,000 and couples with income over $250,000. In other words, the Medicare tax would become a health care tax that would apply to all income, and the portion paid by individuals would have two rates, 1.45 percent and 2.5 percent. Employers would still only pay 1.45 percent on earnings of their employees. And we also proposed an exemption of $50,000 for seniors ($100,000 for married seniors).
CTJ worked for several months with a broad coalition of policy advocates, think-tanks, faith-based groups and labor unions to bring progressive financing options like this to the attention of members of Congress. State-based groups released reports with state-specific figures while national organizations educated lawmakers about progressive financing options and dispelled the myths that were manufactured to block any increase in revenues.
Lawmakers Seek Medicare Tax Reform
Some version of the Medicare tax reform proposal might end up in the final health care reform legislation.
As lawmakers became interested in different variations of this proposal, we analyzed several versions of it, one of which was included in an amendment filed by Senator Debbie Stabenow (D-MI) during a committee markup. The provision that eventually becomes law might be similar to our original proposal. The health care bill approved by the Senate on Christmas Eve included a provision to increase the individual portion of the Medicare payroll tax on earnings from 1.45 percent to 2.35 percent for those above the $200,000/$250,000 threshold. This was estimated to raise about $87 billion over the first ten years after enactment.
Now there is talk that the final bill might include that and also apply the individual portion of the Medicare tax (apparently at a rate of 2.35 percent) to investment income for those taxpayers above the $200,000/$250,000 threshold. The current incarnation entirely exempts all pension income and Social Security benefits.
One tax expert mistakenly told the LA Times that this proposal "could hit some of the elderly who are relying on savings to get by." If the expansion of the Medicare tax only applies (as seems likely) to incomes over $200,000 for singles and $250,000 for married couples, we would hardly call that a tax increase on people who are just "getting by." Only around 2.1 percent of all taxpayers will have adjusted gross income (AGI) above that threshold next year.
What Congress Might Do with the Revenue
The additional revenue that results from extending the Medicare tax to investment income could be used to address two complaints that many Democrats in the House have about the bill approved by the Senate. The first is that the Senate bill's subsidies are not sufficient to make health care affordable for low-income people, as explained in a recent report from the Center on Budget and Policy Priorities.
The second complaint against the Senate bill is that it relies too much on an excise tax on health insurance companies offering high-cost benefit plans. As explained in a report from CTJ, this excise tax is not particularly progressive. Health insurance plans are often high-cost just because a company's workforce is older, more female, or engaged in a riskier activity like mining.
The best case scenario is that many people, including a lot of middle-income people, who currently have high-cost plans will see a portion of those health benefits replaced by wages. That's not as good a deal as you might think, since wages are subject to both the income tax and the payroll tax, while health care benefits are currently tax-free.
And the usual criticism of tax deductions -- that they are worth more to a rich person in the 35 percent bracket than a middle-class person in the 25 percent bracket -- does not apply as much in this case. As the CTJ report explains, if tax-free compensation (like employer-provided health care) is turned into taxable income, rich folks get a break on one of the taxes that would otherwise apply. Taxable earnings are subject to the income tax, the Medicare payroll tax and the Social Security payroll tax, but for the last one there's a limit on how much wages are subject to it.
As of this writing, Congressional leaders are trying to finish up lengthy talks with the President at the White House, and there seems to be an agreement to limit the excise tax on high-cost health insurance plans.
The Faux-Populist CTJ Called "The False Messiah" in 1994
The Washington Post has been embroiled in a scandal concerning its publication on December 31 of a story written by the Fiscal Times, a news organization funded by Peter G. Peterson, the out-spoken and obscenely wealthy deficit-hawk. Peterson, of course, happens to favor a particular approach to deficit-reduction, including cuts to Social Security and Medicare and a commission that can make it easier for Congress to enact such cuts without much debate. Policy analysts and commentators have slammed the Washington Post and Peterson, who seems to favor tax cuts for investment income despite his obsession with budget deficits.
We cannot resist pointing out that CTJ complained about Peterson long before it became fashionable. Read CTJ director Robert McIntyre's take-down of Peterson, written in 1994, and the detailed back-and-forth between the two that follows.
Peterson, a cabinet secretary under President Nixon, has written books and given talks for years about taming budget deficits. His audience probably shrank during the fiscally responsible era at the end of the Clinton administration. But of course, deficits came back under President George W. Bush. And now, the man CTJ called a "false messiah" seems to be enjoying a second coming.
The Ill-Advised Budget Commission Idea
The headline of the Washington Post story in question is "Support Grows for Tackling Nation's Debt." The proposal described in the article was put forth by the chairman and ranking member of the Senate Budget Committee, Kent Conrad (D-ND) and Judd Gregg (R-NH), to create a commission that would make recommendations on how to tackle the budget deficit and put those recommendations on a fast-track to enactment with no committee hearings and no amendments.
Sources tell us that, contrary to the article's headline, there is little support in Congress for this particular commission proposal. And with good reason. One budget expert recently explained to a group of advocates that it only makes sense to create such a commission when Congress has made a decision but can't settle on the details. But it makes no sense to say a commission is needed to settle fundamental questions like how much money the government should spend and how revenue should be collected. Those are questions that elected lawmakers should be able to decide.
For example, when Congress decided it needed to close some military bases several years ago, it faced the obvious problem that no Senator wanted to recommend the closure of a base in his or her state. So Congress reasonably decided to create a commission to study the matter and draw up a list, and then the House and Senate would simply vote up or down, with no committee hearings or amendments.
But it's a far different situation when Congress has not decided some very fundamental issues and is trying to send the controversy to someone else. How much money should the government spend? What programs need to be cut to fit within a budget? Should Social Security and Medicare be cut? How? How much should we collect in taxes? What sorts of taxes should we have? These seem, quite frankly, like the sort of questions that lawmakers are elected to deal with.
The Washington Post Scandal
But none of this is what made the Washington Post story scandalous. The scandal is that the Post published the story as a piece of objective reporting even though it was written by an organization that almost certainly has an ideological bent on the subject matter. The article quotes the Concord Coalition without noting that it, too, receives funding from the foundation Peterson established in 2008 to spread his message. And it cites a report from the Peterson-Pew Commission on Budget Reform, which is partially named after the same Peter G. Peterson, although this is not noted.
The Post's Ombudsman, Andrew Alexander, laid out the evidence against his paper but concluded nonetheless that the Post was not publishing propaganda as news. But no matter how you look at it, the degree to which certain ideas make their way into the public dialogue seems to have a lot more to do with who has a fortune to spend than the soundness of the ideas themselves.
The U.S. House of Representatives adjourned for the year on Wednesday while the Senate hustles to finish legislation on health care. As of this writing, an array of major tax issues are still to be resolved in the next several days or when Congress returns in 2010:
Health Care Reform
On November 7, the House passed its health care bill, (H.R. 3962), which includes a public option. The largest revenue-raising provision in the House health bill is a surcharge of 5.4 percent on adjusted gross incomes over $1 million (or over $500,000 for unmarried individuals).
(See CTJ's previous analysis and state-by-state estimates of the surcharge in the House health care bill.)
The Senate is still working to pass a health care bill, and some reports claim that the chamber could be working on Christmas Eve to accomplish it. While there is a clear majority of Senators willing to support a public option, the rules allowing 41 Senators to filibuster legislation have encouraged a few conservative Democrats to join Republicans in blocking a public option.
While some details remain to be worked out, a majority of Senators seems to have settled on certain revenue-raising provisions to help pay for health care reform. The largest revenue-raiser in the still-developing Senate bill is an excise tax on high-cost health insurance plans. This excise tax is controversial because many analysts conclude that these plans are not particularly generous in the benefits they provide and they are not necessarily enjoyed by high-income workers. Rather, the high costs are often the result of insurers charging more to cover a work force that is older than average or that has high health risks.
(See CTJ's previous analysis concluding that the Senate's proposed excise tax on high-cost health insurance is less progressive than the surcharge in the House health care bill.)
One revenue-raiser in the Senate proposal that is progressive is an increase in the Medicare payroll tax rate on earnings over $250,000 (or over $200,000 for an unmarried individual).
While this tax increase would only affect those who can afford to pay more, an even better proposal would reform the Medicare tax so that it no longer exempts investment income. This idea was included in an amendment that was filed by Senator Debbie Stabenow during the Finance Committee markup, but was not acted on. Such an amendment may be offered when health care reform is debated on the Senate floor.
Job Creation
On December 8, President Obama announced several proposals to create jobs. His best ideas involve direct spending by the federal government (including extending aid to unemployed and low-income people and aid to state and local governments, among other things). His worst ideas involve tax cuts (including eliminating capital gains taxes on small business investment and providing a tax credit for payroll expansion).
(See CTJ's previous discussion of President Obama's job creation proposals and ways to stimulate the economy.)
The House approved a $154 billion jobs bill, as part of a regular appropriations bill (H.R. 2847), before adjourning this week, and thankfully, it focuses on direct spending. One of the few tax cuts included is a provision to remove the earnings requirement (currently set at $3,000) for the refundable portion of the Child Tax Credit, ensuring that low-income families with children can benefit from it. The Senate is not expected to take up jobs legislation until sometime next year.
Estate Tax
The tax cut legislation enacted by President Bush and his allies in Congress in 2001 set the estate tax to gradually shrink until disappearing altogether in 2010. But, like all the Bush tax cuts, this estate tax cut expires at the end of 2010, meaning the estate tax will reappear in 2011 at the pre-Bush levels if Congress simply does nothing.
Families who have several million dollars to leave to the next generation have benefited the most from the infrastructure, educated workforce, stability and other public goods that taxes make possible. So it's entirely reasonable that these families pay a tax on the transfer of their enormous estates from one generation to the next, particularly since the majority of the value in these estates is capital gains income that has never been taxed.
One might be tempted to think that allowing the estate tax to disappear would be fine if it reappears at the pre-Bush levels in 2010. Unfortunately, the one-year repeal of the estate tax could tempt some lawmakers to make that repeal permanent, or might tempt them to allow only a very scaled back version of the estate tax to reappear in 2011.
So the House of Representatives approved a compromise that would make permanent the estate tax rules in effect in 2009. This would partially preserve the Bush cut in the estate tax, but prevent the tax from disappearing in 2010.
Key Democratic Senators indicated that they did not want to make permanent the 2009 rules because -- incredibly -- they were interested in reducing the estate tax even more. Democratic leaders in the Senate attempted but failed to get agreement in the chamber to pass a one-year extension of the 2009 rules, which would prevent the estate tax from disappearing in 2010 and allow Congress to debate a permanent solution as part of the broader tax debate that must happen before the Bush tax cuts expire at the end of next year.
Pathetically, the Senate failed last week to prevent the one-year repeal, which they had known was coming ever since the Bush cut in the estate tax was enacted back in 2001. Democratic leaders in the Senate say they will enact the one-year extension of the 2009 estate tax rules retroactively in 2010. While retroactive tax increases may not be the ideal way to do things, this approach should not cause any problems since tax planners have known for years that Congress was likely to act to prevent this one-year disappearance of the estate tax.
Corporate Tax Breaks (aka "Tax Extenders")
On December 9, the House approved H.R. 4213, which would extend a series of tax cuts (mostly breaks for business) but would offset the costs by closing the infamous "carried interest" loophole for buyout fund managers and by cracking down on offshore tax cheats.
The bill would also require the Joint Committee on Taxation (JCT) to issue reports evaluating these tax cuts before the end of next year, when Congress is likely to act on them again.
CTJ joined the AFL-CIO, SEIU, AFSCME and eight national non-profits in signing a letter in support of H.R. 4213 for these reasons.
The provisions extending the tax cuts (often called the "tax extenders") are enacted by Congress every year or so. CTJ and other analysts have often criticized the tax extenders as corporate pork routed through the tax code.
But H.R. 4213 is a major step in the right direction for the reasons spelled out in the letter to Congress.
(See our previous article on H.R. 4213 explaining the points made in the letter.)
Democratic leaders in the Senate want to pass the tax extenders retroactively early in 2010. One problem is that the chairman of the Senate tax-writing committee, Max Baucus (D-MT) believes that the carried interest issue is “best dealt with in the context of an overall tax reform,” according to a spokesman. As we've explained before, this is an all-purpose excuse for legislators who want to avoid closing even the most unfair and outrageous loopholes.
On Wednesday night, Senate Majority Leader Harry Reid (D-NV) released his health care bill, which is a combination of the health bills approved by the Senate Finance Committee and the Senate Health, Education Labor and Pensions (HELP) Committee. The excise tax on high-cost insurance plans is scaled back a bit from the version included in the Finance bill, probably because Senator Reid heard from health experts and unions who pointed out that plans have high costs sometimes simply because they serve an older workforce or a workforce with more health risks.
One revenue-raising provision that Reid included that had not been in any health bill so far is his proposal to increase the Medicare payroll tax rate (from 1.45 percent to 1.95 percent) for those earning over $200,000, or over $250,000 for married couples. This provision may be inspired by a proposal Citizens for Tax Justice made in May to reform the Medicare tax. CTJ joined forces over the summer with dozens of non-profits, faith-based groups, unions and other members of a coalition called Rebuild and Renew America Now (RRAN) to promote this and other progressive revenue options to help finance health care reform.
But CTJ's proposal would reform the Medicare tax by raising the rate for those with adjusted gross income above $200,000/$250,000 and by expanding the tax so that it applies to investment income as well as wages. The second part of that proposal -- changing the Medicare tax so that it no longer exempts investment income -- is the more significant reform of the two, and we hope it will be added to the health bill as a floor amendment.
To understand why the Medicare tax should apply to investment income, it helps to remember that there are some Americans, most of whom are extremely wealthy, who live entirely off of their investments. A person who lives off his or her investments pays no Medicare taxes. But they can still be eligible for Medicare benefits as long as they worked about ten years (usually) and thus paid Medicare taxes during that time.
Almost all Americans have collected a paycheck for at least ten years before they retire, but some are lucky enough to drop out of the workforce before retirement and collect stock dividends, capital gains, interest and profits from businesses they own a stake in. It's likely that even Paris Hilton will do enough television work and other types of work to become eligible for Medicare -- but she could also spend a whole lot of years not working and not paying the Medicare tax.
Some economists have pointed out that increasing the Medicare tax on wages alone, as Senator Reid proposes, is a problematic idea because it encourages the wealthy to find ways to convert their work income into investment income. This fear may be a little overblown, since Reid's proposal is a mere 0.5 percent tax increase on wages. And the methods that can be used to convert wages into investment income are somewhat limited. (Compensation in the form of stock or stock options is already subject to the Medicare tax, for example.)
But it's true that Senator Reid's proposal does nothing to address the disadvantage our tax system creates for income from work relative to income from wealth. Income from wealth is not subject to the Medicare or Social Security payroll taxes and some income from wealth (like capital gains and stock dividends) is subject to special, low rates in the regular income tax that have no justification.
Expanding the part of the Medicare tax that is paid by individuals (which is currently the 1.45 percent payroll tax paid by employees) to investment income would reduce this unfairness while providing more revenue for health care. And it would do so by closing a gap in the one major health care tax we already have.
Momentum for health care reform continues to build following the passage on Saturday in the House of Representatives of H.R. 3962, the most sweeping health care legislation in decades. The House bill includes a surcharge of 5.4 percent on adjusted gross income (AGI) above $1 million for married couples and $500,000 for singles. As CTJ's new report explains, our calculations confirm statements from the House Ways and Means Committee that this would affect only the richest 0.3 percent of taxpayers in 2011, the first year the surcharge would take effect.
Meanwhile, press reports indicate that Democratic leaders in the Senate are considering changing the Medicare tax as a way to help finance health care reform. It's unclear exactly what is being contemplated, but one option seems to be reforming the Medicare tax so that it no longer exempts investment income. This is one of the revenue proposals that has been championed by CTJ for the past several months.
We currently have one major tax for health care, the Medicare tax, and it applies only to wages and salaries. People who live off their stock dividends, capital gains, interest and other types of investment income contribute nothing to it. What's worse is that the people who have most of this investment income are the wealthiest among us. CTJ and many other organizations have argued that one sound way to raise revenue is to reduce the many ways we subsidize investment income through the tax code.
Another option that Democratic Senate leaders are considering would leave the Medicare tax as a tax on wages and salaries only, but would increaes the rate for those who earn more than $250,000 a year. This would also be a sound, progressive way to raise revenue. But it would be less preferrable, since it would actually increase the disparity between how we tax income from work and how we tax income from wealth.
The fifth and final Congressional committee with jurisdiction over health care reform is poised to approve its version of reform next week, bringing the nation a step closer to a goal that has eluded lawmakers and Presidents for a century. The Senate Finance Committee bill would increase the number of Americans with health insurance from 83 percent to 94 percent and will not increase the budget deficit, according to the Congressional Budget Office.
Three committees in the House of Representatives and the Senate Health, Education, Labor and Pensions (HELP) Committee have all approved health care reform bills. Approval of a bill by the Senate Finance Committee will be an important breakthrough, partly because it is the most conservative of the five committees.
After the Finance Committee approves its bill, the next step will be for Senate leaders and the chairmen of the HELP and Finance Committees to combine the two versions into a bill that will be brought to a vote on the Senate floor. A similar process is currently taking place in the House, where leaders need to combine the three committee bills into one that can be passed on the House floor.
Dispute in the Senate Over Taxing Health Care Benefits and other Revenue-Raisers
The Senate Finance bill includes an excise tax on insurance companies equal to 40 percent of any premiums they charge over certain thresholds ($8,000 for plans for individuals and $21,000 for plans for families). The idea behind this tax is to discourage the use of high-cost health insurance plans, often called "Cadillac plans." As we've reported before, there is a dispute over whether expensive plans really represent over-consumption of health care or merely represent people with greater health risks being charged more for insurance.
Some adjustments were made to the excise tax during the Finance Committee markup. One raises the premium thresholds for the excise tax for people in high-risk jobs and people over age 55. (The thresholds would be $1,850 higher for individuals and $5,000 higher for families.)
The initial proposal from the Finance Committee's chairman, Max Baucus (D-MT) would have required people to obtain health insurance unless there was no policy available that cost less than 10 percent of their adjusted gross income (AGI). One amendment adopted in committee lowered that threshold to 8 percent of AGI. The penalties for individuals without health insurance were also changed to be lower and phased in over time, so that the bill now would create maximum penalties of $200 in 2014, gradually rising to $750 in 2017.
Several Senators have expressed interest in offering amendments on the Senate floor that would do more to make health care affordable for working families. The costs of any such amendment must be offset by revenue-raising provisions. Some of the revenue-raising provisions that were discussed among Finance Committee members and which could be proposed as amendments on the floor were recently analyzed by Citizens for Tax Justice. They include reforming the Medicare tax so that it no longer exempts investment income and limiting itemized deductions for very wealthy taxpayers, among others.
Other issues not related to taxes could receive more attention over the next couple weeks. For example, the Finance Committee bill is the only of the five bills that does not include a public option, which most health experts believe will reduce the overall costs of health care reform.
More Progressive Revenue Provision in House Bill
The revenue-raiser in the House bill is a graduated surcharge on adjusted gross incomes above $280,000 for singles and $350,000 for married couples. There has been some talk of changing the surcharge so that it only applies to AGI above $500,000 for singles and $1 million for married couples. This change is unnecessary, and CTJ has calculated that it would reduce the revenue from the surcharge by over 18 percent. (These variations on the surcharge are also analyzed in CTJ's recent report on revenue options for health care.)
Senator Levin to Offer Tax Haven Legislation to Help Pay for Health Care Reform
This week, Senator Carl Levin of Michigan indicated that he will offer a measure to crack down on offshore tax evasion as a revenue-raiser to help pay for health care reform.
The Stop Tax Haven Abuse Act
The measure Senator Levin plans to offer is one he introduced earlier this year, along with four co-sponsors, as a stand-alone bill called the Stop Tax Haven Abuse Act (S.506). It would enact important new rules to deter offshore transactions designed to evade U.S. income tax. Rep. Doggett introduced the same measure in the House the next day, with 59 co-sponsors (H.R. 1265). A description of the bill’s provisions is available here.
When the bill was originally introduced, Sen. Levin said “our bill provides powerful tools to end offshore tax haven and tax shelter abuses [which] contribute nearly $100 billion to the…annual tax gap.” Sen. Levin said, “With the financial crisis facing our country today and the long list of expenses we’re incurring to try to end that crisis, it is past time for taxes owing to the people’s Treasury to be collected. And it is long past time for Congress to stop tax cheats from shifting their taxes onto the shoulders of honest Americans.
Paying for Health Care Reform with the Tax Haven Bill
A preliminary projection by the Joint Committee on Taxation estimates that the legislation would raise $29.8 billion in revenue over ten years. The ultimate amount of revenue may be many times that. Because these assets and income are not reported to the IRS, the true magnitude of the revenue loss is a mystery.
Attaching the Stop Tax Haven Abuse Act would be a progressive way to help pay for health care reform because it is generally wealthy Americans that are able to take advantage of tax havens. (See CTJ's additional suggestions for progressive ways to pay for health care reform.)
The Tax Haven Problem
It is estimated that the international tax gap — the amount of taxes American companies and wealthy Americans evade through offshore tax activities — is as much as $100 billion per year.
U.S. citizens and residents are taxed on all their income, whether it is earned here or abroad. If a foreign government also taxes the income, that tax may be credited against their U.S. tax.
Wealthy taxpayers are able to avoid paying U.S. taxes that they legally owe by moving assets and income offshore to what are known as “tax havens.” Tax havens are offshore jurisdictions that have low or non-existent income taxes as well as bank secrecy laws that they use to justify being uncooperative with investigations by tax authorities from other countries. Evading U.S. income tax by using tax havens is illegal and U.S. citizens that do it are subject to civil and criminal penalties, including possible prison terms.
The U.S. government’s investigation of banking giant United Bank of Switzerland (UBS) revealed that as many as 52,000 accounts there are owned by Americans. That’s just one bank in one of the dozens of offshore financial centers. Several UBS account owners have already pled guilty to tax evasion.
The latest plea came Tuesday when a Seattle area man, a former sales manager for Boeing, appeared before the court in connection with his plea agreement. Roberto Cittadini faces possible criminal penalties of three years in prison and a maximum fine of $250,000. He has already agreed to a civil penalty for failure to file a Foreign Bank Account Report (FBAR) of up to one-half of the maximum balance of his offshore accounts which at one time contained as much as $1.9 million dollars. The great irony of this particular case is that since Boeing is a multi-billion dollar contractor for the U.S. government, part of Cittadini’s salary was paid by the U.S. government. He moved that money outside of the country to invest it and avoid paying U.S. income tax on the investment earnings.
The National Association of Realtors (NAR) and other groups representing the real estate industry have been a case study in special interest politics for some time. A quick glance a the Congressional Joint Committee on Taxation's tax expenditure report reveals that tax breaks related to housing cost over $100 billion a year, but that's not enough to satisfy NAR and its followers.
The Battles Over the "Carried Interest" Loophole
Two years ago, the Real Estate Roundtable (of which NAR is a member) hired Douglas Holtz-Eakin to defend the "carried interest" loophole, which basically allows those investing other people's money to pretend that they put up their own money, thus entitling them to pay taxes at the low capital gains rate of 15 percent rather than the regular rate of 35 percent that other highly compensated workers pay. (CTJ released a fact sheet debunking Holtz-Eakin's arguments.) The Obama administration continues to support closing the carried interest loophole.
The Homebuyer's Credit
In the last year of the Bush administration, the real estate industry managed to get Congress to adopt, as part of the economic stimulus law enacted in 2008, a $7,500 homebuyer credit that taxpayers would have to pay back to the IRS. This, year, they persuaded Congress to upgrade that to a $8,000 homebuyer credit that does not have to be paid back and that is available to taxpayers under certain income limits if they purchase a home before the end of November of this year.
The homebuyer tax credit was estimated at the time of enactment to have a cost of $6.6 billion, but is actually on track to cost more than twice that.
Since the economic crisis was caused by inflated home prices, it is not at all clear how subsidies provided through the tax code to boost home prices could possibly be good policy.
Ted Gayer at the Brookings Institution has written that:
"The tax credit is very poorly targeted. Approximately 1.9 million buyers are expected to receive the credit, but more than 85 percent of these would have bought a home without the credit. This suggests a price tag of about $15 billion – which is twice what Congress intended – for approximately 350,000 additional home sales. At $43,000 per new home sale, this is a very expensive subsidy."
Perhaps most alarming is the possibility that the homebuyer credit could become another "tax extender," the term used by Congressional staff and lobbyists to describe tax breaks that are ostensibly in effect for only a year or two, but which everyone believes Congress will extend again and again. NAR is, of course, pushing for Congress to extend the homebuyer credit.
Health Care
Perhaps the worst example of special interests fighting to block the common good is the real estate industry's interference in Congress's attempts to reform health care. Early this year, the Obama administration proposed to limit the value of itemized deductions for wealthy taxpayers to 28 percent as a way to raise revenue that would partially fund health care reform. CTJ found that this would affect only the richest 1.3 percent of taxpayers and would merely reduce some of the unfairness that occurs when Congress subsidizes certain activities (like home ownership and charitable giving) through the tax code. NAR, naturally, would have none of it, since this proposal would curtail the savings received by high-income taxpayers when they claim the itemized deduction for home mortgage interest.
In fact, NAR recently has come out against a much more scaled back version of this proposal, which would merely cap itemized deductions at 35 percent.
Currently, the top income tax rate is 35 percent, so the richest Americans can save, at most, 35 cents for each dollar of itemized deductions they claim. But the Bush tax cuts, which lowered the top income tax rate from 39.6 percent to 35 percent, will expire at the end of 2010. That means that in 2011, under current law, each dollar of itemized deductions claimed by a very wealthy person could result in almost 40 cents of savings. Capping itemized deductions at 35 percent would therefore merely freeze in place their current value after the Bush tax cuts expire and rates go back up.
NAR recently issued a statement saying that it opposes even this scaled back proposal to limit itemized deductions and that it "rejects in the strongest possible terms any proposal that would limit the deductions for mortgage interest and real property taxes." NAR is unabashed in its defense of subsidies provided through the tax code for families in the top income tax bracket.
Do the Realtors Oppose the Bush Tax Cuts?
But if the realtors believe that the very rich should receive 39.6 cents for each dollar of itemized deductions they claim, that seems to imply that they think the top income tax rate should revert back to the pre-Bush level of 39.6 percent. Their position seems to be that it is unacceptable for the richest Americans to only save 35 cents for each dollar they claim in itemized deductions. The only way for that number to go back up from 35 to 39.6 is for President Bush's reduction in the top rate to expire. Surprisingly, NAR and CTJ seem to have one position in common, albeit for vastly different reasons.
Are you feeling confused about the myriad revenue options being discussed to finance health care reform? What's the difference between the President's initial proposal to limit itemized deductions and Senator Jay Rockefeller's proposal, which is similar but would result in less of a tax increase? What exactly is the Medicare tax reform included in an amendment filed by Senator Debbie Stabenow, and how does it differ from a similar concept described by CTJ several months ago? How would a "millionaires' surcharge" differ from the surcharge included in the health care bill working its way through the House of Representatives and, for that matter, what is a surcharge?
All these questions are answered in a new report from Citizens for Tax Justice. After describing each of six progressive tax proposals, the report compares their revenue impact and compares their distributional effects nationally and state-by-state.
The good news from President Obama's address to Congress last week was that it included a clear explanation of how health care reform will improve our lives and juxtaposed the benefits of more affordable and efficient health care against other more costly initiatives.
"Add it all up, and the plan I'm proposing will cost around $900 billion over ten years - less than we have spent on the Iraq and Afghanistan wars, and less than the tax cuts for the wealthiest few Americans that Congress passed at the beginning of the previous administration."
President Barack Obama, Address to Joint Session of Congress, September 9, 2009
A recent report from Citizens for Tax Justice finds that the Bush tax cuts cost almost $2.5 trillion over the decade after they were first enacted (2001-2010). Preliminary estimates from the non-partisan Congressional Budget Office show that the House Democrats' health care reform legislation is projected to cost $1 trillion over the decade after it would be enacted (2010-2019).
President Obama said during his address to Congress that his health care plan would cost a little less than the House plan, at "around $900 billion over ten years."
As the President said, even the Bush tax cuts "for the wealthiest few" cost more than his health care plan. The direct cost of the tax cuts for just the richest five percent of taxpayers over the 2001-2010 period is $979 billion. (The cost is even greater if one includes interest payments that resulted because the Bush tax cuts were deficit-financed.
But there is no obvious reason why the cost of health care reform needs to be less than what has been proposed in the House. There is reason to fear that "moderate" lawmakers will continue to negotiate the overall cost downward to some level chosen entirely arbitrarily, and the result will be fewer resources to make health care truly affordable for everyone.
Part of the problem is that the revenue measures that some lawmakers are considering are not substantial enough. The President suggested in his speech that insurance companies be taxed for each plan they offer that exceeds a certain premium level. Senate Finance Chairman Max Baucus has included a similar proposal in his recently released plan, which would require insurers to pay a tax of 35 percent of the portion of the premium exceeding $8,000 for singles and $21,000 for families for any plan.
There's no official estimate of how much revenue this would raise, but the available information indicates that it would be a great deal less than the $543 billion raised by the surcharge on high-income taxpayers included in the House Democrats' proposal.
Congress and the White House can find ample revenue by turning to some of the progressive revenue options analyzed by Citizens for Tax Justice, including the surcharge in the House health care legislation. Other progressive options include the President's previous proposal to limit the benefits of itemized deductions for the wealthy and reforming the Medicare tax so that it no longer exempts people who live off their investments.
There is also a dispute among experts about whether or not taxing insurance companies is good policy. Analysts generally agree that, in effect, the tax would be passed on to employers and employees who have the high-cost plans, often called "Cadillac plans" because they're considered to be so generous. So the effect would be the same as a cap on the exclusion for employer-provided health benefits.
A report from the Center on Budget and Policy Priorities concludes that this will bring down health care costs in a reasonable way, in addition to raising revenue. But some analysts, such as Karen Pollitz at Georgetown University's Health Policy Institute, believe that those with the more expensive plans are not receiving more generous benefits, but merely pay higher premiums because they are employed by companies that have an older workforce or workforce that faces greater health risks. Pollitz argues that "the whole notion of Cadillac plans is kind of a made-up notion."
Either way, Congress should turn to the most progressive revenue options possible, particularly given the shift in income towards the very rich over the past several years and given how much tax cuts have been targeted towards the rich since 2001. The high-income surcharge and the other proposals CTJ has analyzed over the past several months meet that standard.
The Bush Tax Cuts for the Richest Five Percent Cost More than the President's Health Care Proposal
During his address to a joint session of Congress Wednesday night to explain his health care proposal, President Barack Obama noted that his plan would cost less than the Bush tax cuts for the wealthy, a fact demonstrated in a report released earlier this week by Citizens for Tax Justice.
"Add it all up, and the plan I'm proposing will cost around $900 billion over ten years - less than we have spent on the Iraq and Afghanistan wars, and less than the tax cuts for the wealthiest few Americans that Congress passed at the beginning of the previous administration."
President Barack Obama, Address to Joint Session of Congress, September 9, 2009
A recent report from Citizens for Tax Justice finds that the Bush tax cuts cost almost $2.5 trillion over the decade after they were first enacted (2001-2010). Preliminary estimates from the non-partisan Congressional Budget Office show that the House Democrats' health care reform legislation is projected to cost $1 trillion over the decade after it would be enacted (2010-2019). President Obama said during his address to Congress that his health care plan would cost a little less than the House plan, at "around $900 billion over ten years."
As the President said, even the Bush tax cuts "for the wealthiest few" cost more than his health care plan. The direct cost of the tax cuts for just the richest five percent of taxpayers over the 2001-2010 period is $979 billion. (The cost is even greater if one includes interest payments that resulted because the Bush tax cuts were deficit-financed.) In 2010, when all the Bush tax cuts are finally phased in completely, an incredible 52.5 percent of them will go to this wealthiest five percent of taxpayers.
Oddly, many of the lawmakers who claim to be concerned about the cost of the President's health care plan are the same lawmakers who supported the Bush tax cuts, despite their much greater costs.
Read the new report from Citizens for Tax Justice.
These figures make clear that costs cannot be the real concern of lawmakers who oppose health care reform and yet supported the Bush tax cuts. Their position seems to be that showering benefits on the wealthiest five percent of taxpayers and leaving the bill for future generations is preferable to making health care available for all at a much lower cost and paying that cost up front. That demonstrates a different set of priorities than most Americans have, but it doesn't demonstrate much concern about costs.