One of the many options that the committee reportedly has on the table for covering a portion of the $1.5 trillion cost is applying a 1.45 percent Medicare tax to capital-gains and other non-wage income:
The proposal, modeled after a plan released this week by Citizens for Tax Justice, would force people living off investments to contribute taxes to the health-care system, said Steve Wamhoff, legislative director for the Washington research group…“If the only income Paris Hilton gets is capital gains, stock dividends, interest and other types of investment income, currently she is completely exempt from the one big tax we have right now that is dedicated to health care,” Wamhoff said. “We’re saying that probably doesn’t make sense.”
Estimates show that the measure would raise $100 billion over 10 years, but “the proposal is sure to draw fire from Republicans.” “Any proposal that increases the tax on capital income will ignite supply-side conservatives in opposition, as capital gains taxes are enemy number one,” said said Alex Brill, an economist at the American Enterprise Institute. “This is a tax increase that is easy for Republicans to attack.”
It might be an easy tax increase for Republicans to attack, but it should be an easier one for Democrats to defend. The Medicare payroll tax is the “one important tax we already have that is dedicated to funding health care, but it completely exempts wealthy investors whose income takes the form of capital gains, stock dividends, and interest.” Plus, dividends and long-term capital gains are currently taxed at a far lower rate than income earned by other means, with taxpayers in the 25, 28, 33, and 35 percent income tax brackets paying 15 percent. Before the Bush tax cuts of 2003, the capital gains and dividends rate for people in these brackets was 20 percent.
According to an analysis by Citizens for Tax Justice, if this change occurred, “most Americans would either see no tax increase at all or would see a tax increase of less than $100 a year.” More than 64 percent of the increase would be paid by the richest one percent of Americans, and more than 80 percent would be paid by the richest five percent. And for the tax to not unfairly hit moderate income seniors who live off of investment, some sort of senior exemption would need to be included.