By Brandon Debot, Chye-Ching Huang, and Chuck Marr, originally posted by the Center on Budget and Policy Priorities
Republicans’ planned bill to repeal the Affordable Care Act (ACA), which is expected to be similar to the repeal bill that President Obama vetoed in January 2016, would provide an immediate windfall tax cut to the highest-income Americans while raising taxes significantly on about 7 million low- and moderate-income families.
First, it would eliminate two Medicare taxes — the additional Hospital Insurance tax and the Medicare tax on unearned income — that both fall only on high-income filers, thereby cutting taxes substantially for those at the top.
- The top 400 highest-income taxpayers — whose annual incomes average more than $300 million apiece — each would receive an average annual tax cut of about $7 million, we estimate from Internal Revenue Service (IRS) data.
- This group’s tax cut would total about $2.8 billion a year.
- The roughly 160 million households with incomes below $200,000 would get nothing from the repeal of these two taxes.
Second, ACA repeal would significantly raise taxes on about 7 million low- and moderate-income families due to the loss of their premium tax credits — worth an average of $4,800 in 2017 — that help them buy health coverage through the health insurance marketplaces and afford to go to the doctor when needed. [1]
- The $2.8 billion a year total tax cut for the top 400, as noted above, is roughly the value of premium tax credits that 813,000 people in the 20 smallest states and Washington, D.C. would lose combined if the ACA is repealed without a replacement.[2] (See Figure 1.)
400 Highest-Income Households Would Receive Tax Cut Windfall
The ACA’s Medicare taxes fall only on individuals with incomes above $200,000 and couples with incomes above $250,000.
These individuals and couples pay an additional 0.9 percent Hospital Insurance tax on earnings above those amounts, raising the employee share of their Medicare tax rate on earnings to 2.35 percent, from 1.45. They also pay a 3.8 percent Medicare tax on unearned income above those thresholds that’s derived from wealth, such as capital gains, dividends, taxable interest, and royalties.
Before health reform, Medicare taxes applied only to wage and salary and self-employment income, not to unearned income from wealth. For low- and moderate-income working families, which have little unearned income, this meant that Medicare taxes applied to virtually all of their income. In contrast, the wealthiest taxpayers owed no Medicare taxes on their unearned income, which represents a significant share of their income.
| By the Numbers: Top 400 Highest-Income Filers Under Repeal of Affordable Care Act Medicare Taxes | |
|---|---|
| Average annual income: | $318 million |
| Average annual tax cut from repeal of the ACA’s Medicare taxes: | $7 million |
| Total annual tax cut for this group from repeal of the ACA’s Medicare taxes: | $2.8 billion |
Repealing the two ACA Medicare taxes, particularly the 3.8 percent tax on investment and other unearned income, delivers tax cuts that are extremely tilted to the top, as we explained in a previous analysis using Urban-Brookings Tax Policy Center (TPC) estimates.[3] In fact, the 0.4 percent of households with income of over $1 million a year would reap 80 percent of the benefits of repealing these two provisions in 2017.
In this analysis, we use IRS data to examine in further detail the benefits flowing to the very highest income households — the top 400 filers, whose adjusted gross incomes averaged about $318 million in 2014 (the last year for which data are available).[4] More than three-quarters of their income in 2014 — a total of $96 billion for the 400 as a group — came from capital gains, dividends, and taxable interest income.[5]
If the top 400 had similar income levels and sources of income in 2017 and the ACA’s Medicare taxes on high-income households are repealed:
- The top 400 filers will receive tax cuts averaging roughly $7 million apiece;[6] and
- They will receive a net total of about $2.8 billion in tax cuts — roughly $28 billion over ten years if these levels remain similar.
- The $2.8 billion a year that will go to this group is roughly the value of premium tax credits to purchase health insurance that 813,000 people in the 20 smallest states and Washington, D.C. would lose combined if the ACA is repealed without a replacement.[7]
- The tax cuts for the top 400 would raise their incomes after federal income taxes by almost 3 percent.[8]
These estimates are not precise because incomes and income sources for the highest-income taxpayers can be volatile from year to year. For instance, most high-income taxpayers have substantial control over when they “realize” their capital gains income — that is, they can choose when to sell assets that have grown in value. This flexibility leads to variations in unearned income for this group, as they make decisions based on personal financial or economic conditions each year or changes in the tax code, which can affect the share of their income derived from unearned income. In general, the incomes of this group are sensitive to economic conditions, although they have tended to rise over time.
Finally, beyond eliminating these two Medicare taxes, the Republican plan to repeal ACA is expected to include other tax cuts that will benefit the top 400. Republicans also plan to move a broader tax package this year, and the tax proposals from both the House GOP (in its “Better Way” plan issued last June) and President-elect Trump include large, additional net tax cuts heavily focused on the most well-off. These include such proposals as sharply reducing the top business and individual income tax rates and repealing the estate tax.[9]
