NCPA - National Center for Policy Analysis


March 18, 2010

President Obama's 11th-hour decision to apply the 2.9 percent Medicare payroll tax to "unearned income" -- that's what savings and investment income are called in Washington -- wasn't in either the House or Senate bills, though it may now become law with almost no scrutiny, says the Wall Street Journal. 

For the first time, the combined employer-worker 2.9 percent 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, says the Journal: 

  • That would lift the top capital gains rate to 22.9 percent, as the regular rate bounces back to 20 percent from 15 percent when the Bush tax cuts expire at the end of this year.
  • The top rate for dividends would rise to 42.5 percent 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 percent. 


  • Preliminary estimates from the Joint Committee on Taxation peg the revenue from these changes at $183.6 billion over 10 years.
  • The Tax Policy Center of the Urban Institute and Brookings Institution estimates that 86 percent of the revenue from the investment tax would come from people making more than $624,000, or about 1.2 million taxpayers. 

This has led many liberals to claim that it won't matter to investors or harm the economy.  Yet these static analyses ignore the incentive effects forecast by the Institute for Research on the Economics of Taxation, says the Journal: 

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

Earning even a single dollar more than $200,000 in adjusted gross income will slap the 2.9 percent tax on every dollar of a taxpayer's investment income, creating a huge marginal rate spike that will most hurt middle-class earners, as opposed to the super rich, says the Journal. 

Source: Editorial, "ObamaCare's Worst Tax Hike," Wall Street Journal, March 17, 2010. 

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