NCPA - National Center for Policy Analysis

Higher Marginal Taxes

October 16, 2003

The Medicare prescription drug benefit plans that passed the House (H.R.1) and the Senate (S.1) require modest premiums and copayments that will cover only a fraction of the total cost of the benefits seniors will receive. Both drug benefit plans would give extra help to low-income seniors. Their premiums would be reduced or eliminated, copayments would be reduced, and under the Senate bill outlays above the basic benefit cap but below the catastrophic benefit level would be partly covered.

However, these extra subsidies are cut to nothing for seniors who earn a little extra or have some savings. As a result, seniors with very modest incomes would face higher marginal tax rates than the richest Americans, says Stephen J. Entin, president of the Institute for Research on the Economics of Taxation (IRET).

For example, take a participant with an income at 135 percent of the projected 2006 poverty level ($12,960), with $4,500 in drug spending:

  • If the senior took a part time job earning $200 a month, or withdrew $2,400 from an IRA, he or she would lose $2,571 in drug subsidies, for an implicit 107 percent tax rate on the added income.
  • If his drug spending reached the catastrophic level of $5,813 a year (with a subsidy of $3,752), he would face an implicit tax rate of 156 percent on the $2,400 income gain.

For people who are drawing Social Security, modest amounts of additional part-time earnings, even amounts too low to be subject to income tax, will put the recipients over the income range at which all low-income prescription drug subsidies will be lost.

Source: Stephen J. Entin, "Prescription Drug Means Testing = Higher Marginal Tax Rates," Brief Analysis No. 461, October 16, 2003, National Center for Policy Analysis.

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