The tax increases of the Reid plan on ObamaCare

posted at 10:55 am on November 19, 2009 by Ed Morrissey

What do the Reid and Pelosi plans for ObamaCare have in common?  Taxes, taxes, taxes — and Keith Hennessey breaks them down for us this morning.  The Joint Committee on Taxation identified six major new taxes or tax increases that will, according to Harry Reid, suck more than $370 billion out of the economy:

  • 40% excise tax on health coverage in excess of $8,500 (individuals) / $23,000 (families). Amounts are indexed for inflation by CPI-U + 1% – begins in 2013 – $149 B tax increase
  • Additional 0.5% Medicare (Hospital Insurance) tax on wages in excess of $200,000 ($250,000 for joint filers) – begins in 2013 – $54 B tax increase
  • Impose annual fee on manufacturers and importers of branded drugs – begins in 2010 – $22 B tax increase
  • Impose annual fee on manufacturers and importers of certain medical devices – begins in 2010 – $19 B tax increase
  • Cut in half (to $500K) the amount of an executive’s compensation that a health plan can deduct from its corporate income taxes – begins in 2013 – $600 million tax increase
  • Impose 5% excise tax on cosmetic surgery and similar procedures – begins for surgery in 2010 – $6 B tax increase!

Be sure to read all of Keith’s analysis, but pay particular attention to this:

Medicare payroll tax increase (§9015, beginning on page 2040)

Wow. It’s incredible that a Democratic leader would propose this.

Current law:

  • Wages up to $106,800 in 2009 (and in 2010) are subject to payroll taxes of 15.3%: 12.4% Social Security + 2.9% Medicare.
  • Wages above $106,800 are subject to payroll taxes of 2.9%.

My reading of §9014 of the bill tells me that Leader Reid proposes the following addition (changes in red):

  • For individuals, wages between $106,800 and $200,000 for individuals are subject to payroll taxes of 2.9%.
  • For individuals, wages above $200,000 are subject to payroll taxes of 3.4%. That’s a 0.5 percentage point tax increase. So for each $1K you make above $200K, you would pay $5 more in payroll taxes.
  • For joint filers, wages between $106,800 and $250,000 for individuals are subject to payroll taxes of 2.9%.
  • For individuals, wages above $250,000 are subject to payroll taxes of 3.4%. That’s a 0.5 percentage point tax increase. So for each $1K you make above $250K, you would pay $5 more in payroll taxes.

These threshold amounts of $200K and $250K are not indexed for inflation or wages, so more real income in each subsequent year will be subject to the 0.5 percentage point tax increase.

The additional 0.5 percentage point tax increase comes on the employee side, so you still pay income taxes on these additional amounts of taxes paid.

With this proposal, Senator Reid is leading Democrats across a major philosophical threshold. Since Social Security was created in the 30’s and Medicare in 1965, payroll tax revenues have been “dedicated” to financing these programs. While not all funding to finance Medicare comes from payroll taxes, all funding from the Medicare payroll tax finances Medicare. In other words, the 2.9% Hospital Insurance payroll tax that you and your employer pay on your wages is all supposed to offset Medicare spending. That is part of the social insurance model, in which everyone pays in a fraction of their wages, and everyone receives benefits later.

I am not a fan of the social insurance model, because it is non-transparent: most people think their individual taxes paid are being used to finance their benefits, when in fact the funds are used to subsidize other people’s benefits. But the social insurance model and dedicated payroll taxes have been a core principle of Social Security and Medicare financing since they were created, and advocates (especially on the Left) of those programs have fiercely defended this principle.

Leader Reid’s bill would use new Medicare payroll taxes to finance a new health entitlement outside of Medicare. His bill would turn Medicare payroll taxes into a general financing mechanism like the income tax. There is a slippery-slope argument against this that I would normally expect from the Left. If Republicans (or my former boss) had proposed this, I would expect AARP to come unglued and raise fears among seniors that, if this proposal becomes law, future Congresses might take payroll tax revenues and use them for highways or defense or other non-social insurance spending. I am interested to see how AARP reacts. Will they support the Reid bill as they did the House bill? (Reporters: There’s a story for you. Ask AARP.)

In addition, Social Security and Medicare payroll taxes have always worked from the bottom of the wage scale upward, because they are traditionally tied to benefit eligibility. Leader Reid is now creating a “donut hole” in which there are three rate “brackets.” This initiates and lays the groundwork for the future expansion of a progressive tax rate structure for payroll taxes. This makes it easier for future lawmakers to raise payroll taxes to finance other parts of government, because they’re just “taxing the rich.” While the Reid proposal applies only to wages at the top of the distribution, the principle would be in place to justify raising payroll taxes in that $106K – $200K in the future. Watch out.

Both of these are enormous precedents, long-term structural game changers in how we finance our government.

The non-indexing for inflation raises an interesting question about whether it breaks President Obama’s pledge. Was his $250K limit in real or nominal dollars?

This provision is a big risk for moderate Senate Democrats.

Is it as big of a risk for moderates as failing to pass a bill will be for Obama and the progressives?  That’s the big question.  Will people get angry enough over a new government entitlement that purports to solve a real issue for many Americans — the increasing cost of health care?  Never mind, for the moment, that it doesn’t actually solve that problem, but makes it worse.  Most won’t see that until 2013 at the earliest, by which point it will be far too late.

Reid canceled cap-and-trade, for all intents and purposes, by pushing the debate into the spring.  Reid can’t sell cap-and-trade as an entitlement program, after all.  It looks like he cleared the decks for a full-throated push on this bill, hoping to avoid questions such as the ones Hennessey raises.  And it might work, unless American voters get very vocal with their Senators, right now.


Related Posts:

Breaking on Hot Air

Blowback

Trackbacks/Pings

Trackback URL

Comments

Either some terms need to be more clearly defined, or I’m just plain missing something. Unless making a little over $110K really does place you the top wage-earners in the nation.

Dark-Star on November 19, 2009 at 11:41 AM

This is missing the entire point. It doesn’t matter if they’re only raising taxes on people making over a million, or ten million.

This bill fundamentally alters the relationship between a citizen and the state. It increases both taxes and the deficit, and will cause the premiums at your private insurer to rise. It will ultimately lead to unelected officials making decisions about what treatments are ‘cost effective’ to pursue.

How are you letting $5 distract you from the larger picture?

BadgerHawk on November 19, 2009 at 11:53 AM

How are you letting $5 distract you from the larger picture?

BadgerHawk on November 19, 2009 at 11:53 AM

It’s not $5. Stop it.

lorien1973 on November 19, 2009 at 11:54 AM

Who is John Galt?

Yishai on November 19, 2009 at 11:54 AM

How are you letting $5 distract you from the larger picture?

BadgerHawk on November 19, 2009 at 11:53 AM

It’s all he’s got for an argument.

angryed on November 19, 2009 at 11:55 AM

Wow this “FREE” healthcare sure is getting expensive…

Ltlgeneral64 on November 19, 2009 at 11:57 AM

It’s not $5. Stop it.

lorien1973 on November 19, 2009 at 11:54 AM

I’m aware. But Dark-Star’s hung up on it, and Bleeds is sitting here arguing that 40 billion is small fries.

It’s ridiculous.

BadgerHawk on November 19, 2009 at 11:59 AM

Wow this “FREE” healthcare sure is getting expensive…

Ltlgeneral64 on November 19, 2009 at 11:57 AM

I wouldn’t worry about it. Bleeds Blue and other liberals are only going to get the power of the state to force Lorien and BadgerHawk pay for it!

gwelf on November 19, 2009 at 11:59 AM

The idea that $37 billion a year is going to have a significant effect on the economy one way or the other is ludicrous on its face, especially since it be recycled into health care spending which creates employment as surely as whatever it would have been spent on otherwise does.

Bleeds Blue on November 19, 2009 at 11:10 AM

Ridiculous. First of all, government is the most inefficient way of spending money there is. Secondly, taxes have disincentives that go well beyond the dollars themselves.

The proposed taxes on branded drugs ($22 B) and medical devices ($19 B) are very big to the companies that will pay them and will raises prices and discourage R&D. That means less innovation and medical progress.

Any new developments will carry even bigger price tags and will not covered by the government as is happening now in the UK and Canada.

It’s no secret that the vast majority of new medications and devices currently come from American companies who still have the incentive to do so.

Incentives matter. The more you tax or regulate an activity, the less of that activity you will have. To compare a tax to the overall economy in order to minimize its significance, is both intellectually dishonest and economically ignorant.

RadClown on November 19, 2009 at 12:02 PM

BadgerHawk on November 19, 2009 at 11:59 AM

I finally get how he says it’s $37 billion/year. It’s simply rank dishonesty. Geesh.

It’s not $37 billion per year. It’s more than that in the end, given that most tax increases don’t hit for a few years.

lorien1973 on November 19, 2009 at 12:03 PM

This is not an “irrelevant change in tax strategy.” It has massive implications.

It gives Reid and the Democrats a whole new way to be disingenuous about true costs to the American people for their spend-a-paloozas, now and in the future.

It opens the door for a whole new way to tax Americans, when you can use Medicare taxation for non-Medicare purposes.

It gives them a whole new insidious shell game to play against us, and to make us all the more dizzy with, as we try to keep up with their socialist-kleptocratic ways.

I’m telling you, you can’t take your eyes off these spendaholic Washington scoundrels for a damn second.

Edouard on November 19, 2009 at 12:04 PM

Why not just do what libs have been fantasizing about for years and kill off the rich? If my understanding is correct, the rich are the cause of all problems in the world. No more rich people = no more problems.

Who’s with me on this?

angryed on November 19, 2009 at 12:05 PM

ooooh he’s like usin’ dem dere fancy signs and everything. He must be one of dem der smart fellers from Noo York City

angryed (and stupided) on November 19, 2009 at 11:53 AM

Thank you for giving fuel to the “bucktoothed redneck hick” stereotype, idiot.

Dark-Star on November 19, 2009 at 12:07 PM

It’s not $5. Stop it.

lorien1973 on November 19, 2009 at 11:54 AM

Source(s)?

Dark-Star on November 19, 2009 at 12:07 PM

Dark-Star on November 19, 2009 at 12:07 PM

It’s $5/1k. To say it’s simply $5 is a lie.

lorien1973 on November 19, 2009 at 12:09 PM

lorien1973 on November 19, 2009 at 12:03 PM

And here we are talking about minor points in the numbers and completely missing the bigger issues, including how Reid’s proposing to use Medicare taxes to fund other stuff.

Thread derailed. Lefties win, despite not being able to answer even basic questions on the issue and putting forth a completely illogical argument.

BadgerHawk on November 19, 2009 at 12:11 PM

lorien1973 on November 19, 2009 at 12:09 PM

That’s on top of 15.3% of the earnings between 0-100k and on top of 2.9% on earnings over that. So $5 is a nicely constructed lie.

lorien1973 on November 19, 2009 at 12:12 PM

That’s on top of 15.3% of the earnings between 0-100k and on top of 2.9% on earnings over that. So $5 is a nicely constructed lie.

lorien1973 on November 19, 2009 at 12:12 PM

‘Kay. Thank you. Much clearer picture now.

Just asking, are those percentages from already existing taxes or just additional ones being proposed?

Dark-Star on November 19, 2009 at 12:13 PM

You know that nice little booklet you get every year showing how much you’ve contributed, what your benefits will be, etc? That’s why SS taxes are treated differently than the Ag budget.

angryed on November 19, 2009 at 11:51 AM

He doesn’t know about that booklet, you have to have a job to get one.

Aviator on November 19, 2009 at 12:14 PM

BadgerHawk on November 19, 2009 at 12:11 PM

It doesn’t matter. You can’t explain things to people who want their binky. They can barely come up with votes to start a debate.

It’s ridiculous to have people here supporting a tax increase that will be completely different in its final version. This version was simply made to get some good CBO score.

What I find amusing is that $370 billion tax increase is nothing, but Bush’s $300 billion tax cut was the end of the world (and still is, to liberals).

lorien1973 on November 19, 2009 at 12:14 PM

Dark-Star on November 19, 2009 at 12:13 PM

OMG. Really? Are you not employed?

lorien1973 on November 19, 2009 at 12:15 PM

The average Dumbocrat doesn’t understand this. Remember most people think if they get a tax refund it means they pay no taxes. So if they get $1000 tax refund this year but only a $600 refund next year due to $400 in extra taxes, they don’t know. They still think they got a gift from Obama.

This is what 50 years of public school education has done to the population.

angryed on November 19, 2009 at 12:18 PM

OMG. Really? Are you not employed?

lorien1973 on November 19, 2009 at 12:15 PM

He’s an Obama supporter. Do you really have to ask that question?

angryed on November 19, 2009 at 12:19 PM

He’s an Obama supporter. Do you really have to ask that question?

angryed on November 19, 2009 at 12:19 PM

Ah, more ASSuming by an angry asshole.

Wrongo, wingnut. Voted third-party in ’08 out of disgust at McShame, will either vote for Paul or Palin next time, depending on who has the better shot at POTUS.

Dark-Star on November 19, 2009 at 12:20 PM

Is this the only language liberals know? Taxes, money, give me more, taxes, money, give me more!

capejasmine on November 19, 2009 at 12:21 PM

Just asking, are those percentages from already existing taxes or just additional ones being proposed?

Dark-Star on November 19, 2009 at 12:13 PM

Dude. Are you doing this on purpose?

BadgerHawk on November 19, 2009 at 12:23 PM

He’s an Obama supporter. Do you really have to ask that question?

angryed on November 19, 2009 at 12:19 PM

More @$$uming from an angry @$$hole.

Voted third-party in ’08, saw 0bama’s many disasters coming a mile away. Will cast my ballot for either one of the P’s – Paul or Palin – depending on who has the better shot at winning when the election finally arrives.

Dark-Star on November 19, 2009 at 12:24 PM

Dude. Are you doing this on purpose?

BadgerHawk on November 19, 2009 at 12:23 PM

Asking honest questions? Yes I am.

Also suffering from ‘morning brain’, as well.

Dark-Star on November 19, 2009 at 12:24 PM

What I find amusing is that $370 billion tax increase is nothing, but Bush’s $300 billion tax cut was the end of the world (and still is, to liberals).

lorien1973 on November 19, 2009 at 12:14 PM

And let’s not forget, that $300 B tax cut goes away next year. So, on top of all the new ones will be the old ones being re-instated. But not a peep out of the libs on this. That would make it a $670 B tax “increase“!!

Some kind of “Hope & Change” there, eh??

JohnnyD on November 19, 2009 at 12:26 PM

The part that won’t make sense to people is taxes preceding benefits.

That’s a complete change and simply won’t be acceptable right now in a deep recession.

AnninCA on November 19, 2009 at 12:27 PM

And let’s not forget the massive tax increases coming in 2011 on everyone who pays income taxes. That will also include a 33% increase in capital gains taxes that will further discourage investment and actually bring in less revenue to the government.

Let’s understand that you can have economic equality or prosperity. You can’t have both. It’s never happened and never will.

RadClown on November 19, 2009 at 12:30 PM

Let’s understand that you can have economic equality or prosperity. You can’t have both. It’s never happened and never will.

RadClown on November 19, 2009 at 12:30 PM

That depends heavily on one’s definitions of ‘equality’ and ‘prosperity’.

But with the definitions the moonbats-in-power are using, we’ll all be ‘equal’ like a bunch of cows in a slaughterhouse.

Dark-Star on November 19, 2009 at 12:33 PM

Dark-Star on November 19, 2009 at 12:24 PM

Fair enough.

There are some serious tax increases coming down the pipe, and not just for the ‘uber-rich’. President Obama vowing to get all crazy on the deficit starting with his State of the Union address in January was the first laying of the ground work.

This health bill will raises your insurance premiums, even if if you don’t make enough to get hit directly with the new taxes. It raises taxes on medical devices; taxes which ultimately get passed onto the consumers of those devices. Even with all the additional taxes, under the rosiest scenario, it still adds to the deficit by hiding the ‘doctor fix’.

They’re proposing to let the Bush tax cuts expire. Not just the highest marginal rate, but ALL the tax cuts, including the capital gains reduction. So you’re a middle class guy who’s worked hard and saved? Doesn’t matter. Those dividends in your retirement are getting taxed higher.

There are countless other smaller initiatives, from property taxes to soda taxes, to increases in witholding, that Ed could fill a week’s worth of posts with.

If you think only the ‘uber-rich’ are going to get hit you’re being dangerously naive.

BadgerHawk on November 19, 2009 at 12:36 PM

The part that won’t make sense to people is taxes preceding benefits.

That’s a complete change and simply won’t be acceptable right now in a deep recession.

AnninCA on November 19, 2009 at 12:27 PM

The taxes have preceeded benefits under every version of this bill. It’s the only way they could get the CBO scoring to look even close to deficit neutral.

BadgerHawk on November 19, 2009 at 12:37 PM

BadgerHawk on November 19, 2009 at 12:36 PM

Clears up everything. Thank you.

Dark-Star on November 19, 2009 at 12:41 PM

Man, if there’s one thing Democrats know it’s the economy…… RAISING TAXES!

JoeinTX on November 19, 2009 at 11:02 AM

fify

mankai on November 19, 2009 at 12:53 PM

Record Deficits and the Chinese demanding payment!

The number of Unempolyed Americans approaching the number of Employed Illegal Aliens!

What would passing free healthScare for all and Amnesty for all do to help this situtation?

A.)Unionize Doctors and Nurses so union pension funds won’t go broke?
B.)Solve the Illegal Alien problem by makin them all legal?
C.) Guarantee Dimwit majorities for life by legalizing third world border crossers, enrolling them in free benefits for life and registering them as good little Dimwhit voters?
D.) Bring to its’ knees the Freedom Loving America Pinnochio, Michelle, Holder, Rev.Wright, Bill Ayers dispise?
E.) All of the above?

dhunter on November 19, 2009 at 1:05 PM

You’re joshing right? You mean the money isn’t coming out of Obama’s stash as the woman suggested on the audio that HotAir linked a few days ago?

Isn’t it time for HotAir to link that thoughtful lady again? Failing that, if anyone has that link, I sure would like it.

burt on November 19, 2009 at 1:28 PM

The ‘uber-rich’ don’t pay big tax bills, e.d. the Kennedy clan. These tax increases are suposedly targeted at high earners.

burt on November 19, 2009 at 1:38 PM

Read Ayn Rand, Altas Shrugged.

Question the premises they’re putting forth. Requiring, at the barrel of a gun, the labor of one individual who can produce for the benefit of another individual who can’t (or won’t) is the very definition of slavery.

The looters know only one thing, looting. The moochers don’t even know that much, they simply know how to vote for looters. And as it turns out, that’s all they have to know.

Do NOT let them talk you into giving up your freedom by making you think that producing is evil and needs to be taxed at the exhorbitant rate they’re demanding (again, at the barrel of a gun). The moochers have done nothing to earn what you produced, and the looters know you are the one keeping them alive.

If you do give in to their guilt, YOU are the one responsible for keeping the status quo in place, YOU are the one who has sold yourself into slavery to people who hate you for your ability to produce what they consume.

Demand your freedom, refuse to play by rules designed to kill you, in a game you can’t ever win.

runawayyyy on November 19, 2009 at 3:43 PM

The idea that $37 billion a year is going to have a significant effect on the economy one way or the other is ludicrous on its face, especially since it be recycled into health care spending which creates employment as surely as whatever it would have been spent on otherwise does.

Bleeds Blue on November 19, 2009 at 11:10 AM

Thank you for providing this self-refuting commentary on Keynsian economics. If spending $37 billion dollars on healthcare spending creates employment as surely as whatever it would have been spent on otherwise does, the obvious correlary is that whatever it was being spent on before created employment, too.

Therefore, there is no net advantage to taxing and spending as an effort to “stimulate” the economy, as the money that is taken in taxes was already creating employment to begin with. Moving it from one place to another isn’t creating anything, it’s just moving it around.

So let’s repeal the remaining “stimulus” funding that hasn’t been pounded down a rathole already, shall we?

VekTor on November 19, 2009 at 4:03 PM

I truly hope these two communists rot in he11! And the sooner they get there the better off this country will be.

Griz on November 19, 2009 at 8:18 PM