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Wednesday, March 17, 2010

WSJ: ObamaCare's Worst Tax Hike

Wall Street Journal editorial, ObamaCare's Worst Tax Hike: For the First Time, Payroll Levies Will Hit Investment Income:

The forced march to pass ObamaCare continues, and all that matters now is raw politics. But opponents should go down swinging, and that means exposing such policy debacles as President Obama's 11th-hour decision to apply the 2.9% Medicare payroll tax to "unearned income."

That's what savings and investment income are called in Washington, and this destructive tax wasn't in either the House or Senate bills, though it may now become law with almost no scrutiny.

For the first time, the combined employer-worker 2.9% Medicare rate would be extended beyond wages to interest, dividends, capital gains, annuities, royalties and rents for individuals with adjusted gross income above $200,000 and joint filers over $250,000.

That would lift the top capital-gains rate to 22.9% as the regular rate bounces back to 20% from 15% when the Bush tax cuts expire at the end of this year. The top rate for dividends would rise to 42.5% when the Bush income-tax rates expire. The White House plan also raises the ordinary Medicare payroll tax by 0.9 percentage points for the same filers, bringing it to 3.8%. ...

Stephen Entin and colleagues estimates that the investment tax would depress GDP by about 1.3% and reduce capital formation by 3.4%, and thus reduce the after-tax incomes of everyone not paying the tax directly in the neighborhood of 1.1% to 1.2%. Labor productivity and wages would fall across the board, while the lost government revenues from the more-sluggish economy would offset the expected receipts. ...

This two-tier tax also fundamentally and probably irrevocably alters the social insurance model that has governed Medicare for more than a half-century. Medicare is supposed to be a universal entitlement with at least some connection between the taxes paid on wages in return for benefits. The investment tax, and the apparatus of ObamaCare financing more generally, severs this link by redirecting Medicare's "dedicated" revenues toward a new entitlement.

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Comments

this is one reason why many Obama supporters are now turned to Obama haters.

Posted by: renaissance costume | Mar 17, 2010 3:54:11 AM

But what is the ideological basis, even from a conservative perspective, for taxing wage income higher than investment income? WWRS (what would Reagan say)?

Posted by: mike livingston | Mar 17, 2010 6:33:49 AM

To answer your question, what is the basis from a conservative standpoint for taxing wage income differently than investment income: I think that it is more of an accounting difference. There is no such thing as negative wages. A payroll tax is a tax on new funds. (You don't discover at the end of a year that your paychecks were negative and you employer was actually taking money out of your bank account, not paying you). Investment is different, it goes both ways. You can win or you can lose. Although investors hope to have positive income, it is possible to lose everything. So to put a blanket tax on investment income isn't comparable to a payroll tax. To treat investment income on parity with wage income, there would have to be a tax credit everytime an investment went south. Also, due to inflation, much of investment "income" is really just recovery of inflation, not income at all. Another problem is income variation. Take someone who makes 400k one year and 0 the next, an average of 200k per year. They will have 200k in the good year subject to the tax even though on average, their investment income was below the threshold. It is very common for investment income to vary this way. Additionaly, from a conservative standpoint, I think think that investment taxes are very destructive to an economy. Investment is what provides jobs and opportunitiy and it is very mobile and can leave our country and go elsewhere.

Posted by: Chris | Mar 22, 2010 2:47:59 AM