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.