Top Earners Would Pay Less Tax Under GOP Health-Care Proposal
Two levies affecting high-income people would be repealed under the plan
Republican lawmakers included repeals of two taxes in their new health-care proposal. PHOTO: MICHAEL REYNOLDS/EUROPEAN PRESSPHOTO
By RICHARD RUBIN Updated March 7, 2017 1:25 p.m. ET
WASHINGTON—Households at the top of the U.S. income ladder would see taxes on their wages and investments drop under the House Republicans’ new health-care proposal.
As expected, the bill repeals a 3.8% tax on investment income and a 0.9% tax on wages. Both levies affect only the highest-earning households, those individuals making at least $200,000 and married couples making more than $250,000.
Republicans have opposed the taxes since they were created as part of the 2010 Affordable Care Act, and they included repeals in the plan they released Monday and plan to push through committee as early as Wednesday.
House Ways and Means Committee Chairman Kevin Brady (R., Texas) said he disagreed with the premise that repealing the ACA’s taxes would benefit the most affluent.
“You run down tax increase after tax increase—they hurt the economy, they hurt health care, they achieve nothing,” he told reporters on Tuesday. “We have an economy that’s struggling. …Part of this is to remove the damaging—we think job-killing—taxes in the ACA” to boost economic growth, he said.
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Democrats blasted the repeals of the tax provisions, saying the measures would redistribute wealth from middle-class recipients of health-insurance subsidies to top earners.
“This bill sends a loud and clear message: tax cuts for special interests and the wealthy matter more than your health care,” said Sen. Ron Wyden of Oregon, the top Democrat on the Senate Finance Committee
In all, the GOP bill cuts almost $600 billion in taxes, according to estimates released Tuesday by the nonpartisan congressional Joint Committee on Taxation, including the major levies on high-income households and narrow provisions on indoor tanning and executive compensation at health insurance companies. Some provisions, including tax credits to assist people in purchasing health insurance, aren’t part of the estimates released Tuesday and will be included in a forthcoming study by the Congressional Budget Office.
The investment tax yielded $18.3 billion for the government in tax year 2015, and the wage tax produced $8.6 billion, according to IRS data released last week. Both taxes were paid by fewer than four million households, or roughly the top 2.5% of U.S. households. Repealing the investment tax will reduce federal taxes by $157.6 billion over a decade, while ending the wage tax will cut collections by $117.3 billion, according to the JCT estimates released Tuesday.
Unlike taxes on pharmaceuticals, medical devices and health insurance that were also enacted as part of the Affordable Care Act, the taxes on high-income households have a tenuous connection to health care. They were included in the 2010 health-care law to help pay for it. The wage tax is piggybacked onto an existing Medicare payroll tax.
But they operate economically just like any other taxes on high-income households, which get a significant share of their income from capital gains and dividends. Repealing the investment tax would boost after-tax income by 1.6% for the top 1% of households and give the top 0.1% an average tax cut of $165,000, according to the Tax Policy Center, a project of the Urban Institute and Brookings Institution.
Under the House plan, the repeals would take effect in 2018 and would drop the top tax rate on capital gains and dividends to 20% from 23.8%. That decision means the highest-earning households wouldn’t get a windfall based on past decisions, but they could have some powerful reasons to make tax-based decisions this year.
For households in the top tax bracket, delaying a $1 million capital gain from 2017 to 2018 would yield $38,000 in tax savings. Research and experience shows that capital gains realizations are very sensitive to tax rates, with investors choosing to delay or accelerate asset sales to lower their taxes.
Similarly, companies would have an incentive to delay dividend payments, so that shareholders could benefit from the break.
People with the ability to choose when they earn wages could also delay those payments. Pushing a $500,000 bonus from 2017 to 2018 would save up to $4,500.
Repealing the taxes now would help households that haven’t yet been affected by the two taxes but could be in the future. Unlike most pieces of the tax code, the $200,000 and $250,000 thresholds were intentionally not indexed to inflation, meaning that both taxes are scheduled, under current law, to steadily expand their reach.
The GOP repeal bill also would end several taxes that are tied to health care and affect households at all income levels. The proposal would end caps on flexible spending arrangements, which let workers set pretax money aside to pay for out-of-pocket health costs; that limit is now $2,600. Flexible spending accounts could again be used to pay for over-the-counter medication without a prescription, reversing a piece of the 2010 law.
The GOP plan would also reinstate a lower limit—7.5% of adjusted gross income—above which taxpayers could claim an itemized deduction for medical expenses. The 2010 health law created a 10% floor for that deduction and repealing it would save taxpayers $34.9 billion over a decade, according to the Joint Committee on Taxation.
Republicans also want to repeal the industry-specific taxes embedded in the health law. Those include a 2.3% tax on medical devices and industrywide fees on pharmaceuticals and health insurance that were divided up among companies. Cutting those three provisions reduces taxes by about $189 billion over a decade.
Write to Richard Rubin at email@example.com