This content is provided by the Americans for Tax Reform Foundation.

Current Law

A 2.9% ‘Medicare Hospital Insurance Tax’ is imposed on employee wages and wages earned by the self-employed. Half of the burden for this payroll tax is borne by employers, so the nominal rate for both employers and employees is 1.45%, although employers usually shifts the brunt of their costs to employees in the form of lower compensation. In effect, this bumps up the employee rate substantially. Self-employed individuals pay the tax’s full 2.9% upfront.

There is no ceiling or limit on how much of an individual’s wages are subject to the Medicare tax.

Scheduled Change

In 2013, high-income individuals will have an additional 0.9% of their wages withheld above a certain threshold, courtesy of Obamacare’s ‘Additional Medicare Tax,’ which is really a surtax (that is, a tax piled on top of an existing tax).

Employees whose earned income exceeds specified threshold limits ($250,000 for joint filers and $200,000 for single filers) will pay 2.35% on the excess amount; employers have been spared a tax increase, and will continue to pay 1.45% on all wages. Self-employed individuals, meanwhile, will see their tax burden shoot up to 3.8% for income over the threshold.

ATRF Analysis

Although the Additional Medicare Tax is billed as a tax on “the rich,” it is not clear that the impacted parties are rich at all. A household that makes $250,000 per year is likely to live comfortably, but its amenities will vary drastically based on location — that $250,000 will buy far more in suburban Des Moines than it would in downtown Manhattan.* Talk of “the rich,” then, is usually cover to avoid specifying the actual income thresholds of painful tax hikes like the Medicare surtax.

The Medicare surtax is pernicious because of its unchecked potential to expand through bracket creep. The surtax’s income thresholds are not indexed to inflation, so they will gobble up more taxpayers as time winds on. According to data from the Bureau of Economic Analysis and ATRF calculations, the number of filers subject to the Medicare surtax will double every 16 years, increasing by over two million filers from its implementation in 2013 to 2029.

For this reason, the Additional Medicare Tax shares more than just an acronym with the Alternative Minimum Tax, which is a prime example of progressive taxation gone wrong. The AMT was created in 1969 to gouge 155 rich Americans. Because of inflation, today roughly four million taxpayers are ensnared by its requirements.

Similar bracket creep will take place with the Medicare surtax, and it will quickly shift from a tax on “the rich” (however nominally it achieves even that) to a tax on the bulk of American workers.
 
10-Year Cost to Taxpayers

$86 billion

*Correction: This brief was edited to remove a quote from Citizens for Tax Justice which incorrectly represented their position on taxing those who make above $250,000 per year. Far be it from ATRF to imply that CTJ supports tax cuts (or even the current burden of taxation) on this group — they do not.

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