Is Raising The Payroll Tax The Best Way To Fund Health Care Reform?

Harry_Reid1The Associated Press is reporting that Majority Leader Harry Reid (D-NV) plans to increase the payroll tax used to fund Medicare to help pay for health care reform. “Current law sets the tax at 1.45 percent of income, an amount matched by employers.”

“The increase would apply only to the portion of income above $250,000 a year, so it would be limited to relatively high earners. And the details — including how big the hike might be — remain unclear.” The payroll tax may supplant the Senate bill’s excise tax on so-called Cadillac health care plans, which has proven unpopular with labor and the insurance industry.

The payroll increase is also quite different than the approach in the House, where Democrats passed a bill to place a 5.4% surtax on families with incomes over $500,000. Below is a comparison table of the options:

Payroll Tax On Those Earning More Than $250K 5.4% Surtax On Families w/ Incomes Over $500K 40% Excise Tax On Insurers That Offer ‘Cadillac’ Health Plans’
– Only affects high wage earners but does not force Americans with higher investment income to contribute.

– Raises less money than surtax or excise tax because it effects fewer individuals, taxes a smaller amount of money at a lower percentage.

– Since businesses make a matching contribution, they too would contribute to reforming the health care system — reforms they would benefit from.

– A safe political approach, since the payroll tax is widely accepted by economists and the public.

– Progressive. The more money you make, the more you pay in taxes.

– Tax is inclusive of investor income.

– Often seen as a way to “roll back” the Bush tax cuts, which disproportionately benefited the rich.

– Can raise large amounts of money without discouraging economic activity.

– Invests new money in the system without reducing existing waste.

– Taxing insurers for providing costly plans, while excluding older Americans and those in high risk professions, would slow the rate of health care spending.

– Produces savings that rise over time at least as fast as the costs of providing health insurance to those now uninsured.

– Over 80 percent of the revenue generated would come not from the tax on insurance premiums itself, but from income and payroll tax revenue on the tens of billions of dollars of higher wages that workers would receive.

– By receiving higher wages and paying somewhat more in payroll taxes, most affected workers would qualify for higher Social Security payments when they retire.