Economics, Pethokoukis

The terrible little tax inside Obama’s health care reform law

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Perhaps never has a more harmful and deceptively named tax received so little attention. The 2010 health care reform law, the Affordable Care Act, included a whopping 3.8 percentage point tax hike on interest, dividends, capital gains, and passive business income received by higher-income Americans. It took effect as of Jan. 1 this year. The levy is called the Unearned Income Medicare Contribution, or UIMC. And when combined with the expiration of the upper-income Bush II tax cuts, it raises investment tax rates from 15% to just shy of 24% (not counting the 1.2% Pease add on). Several observations:

1. The tax applies applies only to taxpayers with modified adjusted gross incomes over $200,000 (individuals) and $250,000 (married couples). Unfortunately, those threshold incomes are not indexed to inflation. So while 3.7 million households will get clipped this year, that number will rise with time, hitting an estimated 7.5 million in 2022.

2. Despite a) the tax’s name and b) that it was passed as part of health care reform, dough from the UIMC is not earmarked for Medicare but goes right into the general treasury to be spent for whatever purpose Congress deems appropriate. And as AEI’s Alan Viard points out in a new Tax Notes pieces (from which this post draws upon heavily), “Of the four words in the [UIMC name], three are misnomers. The word ‘income’ is correct because the UIMC is indeed imposed on some categories of income. However, the taxed income is not unearned and the tax is not a Medicare contribution.”

3. The tax is anti-growth, anti-savings, anti-investment economics. It also diminished the impact of one of the few things in the ACA that might have actually reduced health spending inflation. Viard:

All else equal, a tax that reduces the incentive to save and invest impedes long-run growth. The full impact, however, depends on what would have happened without the tax. For example, a tax that penalizes private saving, but is used to reduce the budget deficit, may increase national saving, which equals private saving minus the deficit. Unfortunately, the UIMC was added to the healthcare law largely as a way to scale back and delay the excise tax on Cadillac health insurance plans. The change had dubious economic effects. While the UIMC discourages saving, the excise tax curtails the growth of medical costs.

One more example of how now that we’ve passed the ACA, we are unfortunately finding out what’s really in it.

5 thoughts on “The terrible little tax inside Obama’s health care reform law

  1. Lessee. An extra 3.8 percentage points on an average taxpayer’s interest income is …. a rounding error! Maybe we should hold the angst until the Fed revives an economy laid low by the last round of supply-side wishful thinking.

    • Lessee, maybe you’re a clueless idiot. The Fed has been trying to “revive the economy” by printing money for a solid decade now. You think maybe it’s time to stop doubling down on dumb? Reconsider?

      Secondly, if the symptoms of an economy “laid low” are a lack of jobs — just where do you think those jobs are going to come from? The government will hire you to fill shovel-ready holes? The “average taxpayer” is going to have an extra “rounding error” in his paycheck, and will want to spend it on an extra smidge of bacon Sunday morning — and his desire will magically cause the farmer, transportation chain, grocery store owner, manager, and checkout clerk to all magically appear, without the need for a drop of capital in advance? Or let us suppose some small business does start up and, as is typical, pays taxes as an individual (the owner). So that business gets hit with an extra 3.8% tax for Obama to spend on Obamaphones or Win The Future green jobs boondoggles for his rich Silicon Valley friends and fundraisers. Do you think your teenager or recent college grad is going to see a “Help Wanted” sign in that business storefront?

      Finally, maybe you should actually look up the record of that “last round of supply-side wishful thinking,” e.g. the record of the Reagan Administration 1982-1989, or even the much weaker attempts of George W. Bush 2001-07 (until we got a Democratic Congress). Hint: it’s got economic growth approximately double the Obama years, and unemployment approximately half. If those FACTS constitute “wishful thinking” then you’ve got some serious difficulties perceiving reality.

  2. Carl, the poster Todd Mason is an idiot, but one assigned by Organizing for Obama to undercut AEI & Jim Pethokoukis commentary. An actual leftwinger would not be reading an AEI article, let alone Jim P., just as we don’t bother reading a Move On sourced article. While Obama has employed these trolls for 4 years, they are now on every conservative site. If Todd isn’t being paid for his propaganda efforts, then he is as dumb as his jottings.

  3. The trolls who routinely appear on the “conservative” websites (read: any website that does not parrot the Democratic Party line regardless of internal inconsistency or hypocrisy) are indeed idiots (somewhere a village is missing theirs), but hired ones. Unfortunately, they often succeed at sucking the energy out of informed discourse of the independent-minded people on the “right” (read: anyone not willing to follow Obama and his minions off whatever cliff they seem all too eager to crash on).

    I am not sure of the very best strategy, but if I see one of these anti-free speech trolls (whose goal is ultimately to crush “dissent”), I put my phasers on ignore.

  4. This looks exactly like the AMT, which was created to affect all of 150 people, but ends up snaring millions. Congress just loves non-indexed taxes because as the government debases the dollar they get more and more revenue without actually having to vote for a tax increase.

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