NCPA - National Center for Policy Analysis


November 6, 2009

Buried in Nancy Pelosi's health care bill is a provision that will partially repeal tax indexing for inflation, meaning that as workers earnings rise over a lifetime they can look forward to paying higher rates even if their income gains aren't real, says the Wall Street Journal.

In order to raise enough money to make their plan look like it won't add to the deficit, House Democrats have deliberately not indexed two main tax features of their plan, explains the Journal: The $500,000 threshold for the 5.4-percentage-point income tax surcharge, and the payroll level at which small businesses must pay a new 8 percent tax penalty for not offering health insurance.

This is a sneaky way for politicians to pry more money out of workers every year without having to legislate tax increases.  The negative effects of failing to index compound over time, yielding a revenue windfall for government as the years go on, says the Journal:

  • The House tax surcharge is estimated to raise $460.5 billion over 10 years, but only $30.9 billion in 2011, rising to $68.4 billion in 2019, according to the Joint Tax Committee.
  • The tax would begin in 2011 on income above $500,000 for singles and $1 million for joint filers.
  • Assuming a 4 percent annual inflation rate over the next decade, that $500,000 for an individual tax filer would hit families with the inflation-adjusted equivalent of an income of about $335,000 by 2020.
  • After 20 years without indexing, the surcharge threshold would be roughly $250,000.

And by the way, this surcharge has also been sneakily written to apply to modified adjusted gross income, which means it applies to both capital gains and dividends that are taxed at lower rates, explains the Journal:

  • So the capital gains tax rate that is now 15 percent would increase in 2011 to 25.4 percent with the surcharge and repeal of the Bush tax rates.
  • The tax rate on dividends would rise to 45 percent from 15 percent (5.4 percent plus the pre-Bush rate of 39.6 percent).

The return of the inflation tax will hit millions of middle-class Americans over time with tax rates advertised as only hitting "the rich," says the Journal.

Source: Editorial, "The Return of the Inflation Tax," Wall Street Journal, November 6, 2009.

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