Most analysis of the American Health Care Act, the new House Republican plan for repealing and replacing Obamacare, has focused on the fact that it will take away health insurance from millions of Americans, including, eventually, millions of poor, elderly, and disabled Americans currently on Medicaid. It’s reasonable in light of that to ask what there is to like about the proposal.
The main answer, for Republicans is Congress, is that it also contains $600 billion in tax cuts — tax cuts that would save the wealthiest 0.1 percent of Americans nearly $200,000 each in a single year, according to a batch of analyses released by the Joint Committee on Taxation on Tuesday.
The Committee for a Responsible Federal Budget helpfully combined them into a single table:
The single biggest tax cut included in the bill is the repeal of the 3.8 percent tax the Affordable Care Act applied to capital gains, dividend, and interest income for families with $250,000 or more in income ($125,000 for singles).
Repealing that tax is a change that, by definition, only helps the rich, or at least the affluent. If you’re part of a married couple and, like the vast majority of Americans, make less than $250,000 a year, or earn more than that but have little investment income, it doesn’t affect you at all. The Tax Policy Center finds that repealing the tax would amount to an average tax cut of $0 for households in the bottom 90 percent — those making $208,500 or below. A handful of people in the 80th to 95th percentiles would see cuts, but the vast majority wouldn’t.
By contrast, members of the top 0.1 percent, who each on average make more than $3.75 million annually, would get an average tax cut of $165,090.
The second-biggest cut is the elimination of a fee on health insurance companies. Which Americans are affected by this fee right now is less clear; insurers have said they’re passing on the cost to consumers in the form of higher premiums, but exactly which premiums are raised and whether insurers actually eat some of it isn’t totally clear.
Then there’s the 0.9 percent Medicare surtax, a hike on wage income in excess of $250,000 a year ($200,000 for unmarried people). The Republican bill would repeal this surtax and, in so doing, give everyone in the bottom 90 percent an average tax cut of $0, per the Tax Policy Center. The richest of the rich, the top 0.1 percent, would get an average cut of $30,520.
We don’t have a full distributional analysis of the Republican bill yet. But the Medicare surtax and the investment tax alone combine to a tax cut of $195,610 for the top 0.1 percent, not far off from the $197,340 average cut estimated for full repeal of Obamacare. It’s hard to overstate what a massive windfall this is for the richest Americans. You don’t have to be a total cynic about the wealthy’s influence on American politics to see this as a major factor motivating Republicans’ determination to rapidly pass a replacement plan that eliminates most of Obamacare’s taxes.
ACA Repeal Would Lavish Medicare Tax Cuts on 400 Highest-Income Households
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.THE TOTAL TAX CUT FOR THE TOP 400 IS ROUGHLY THE VALUE OF PREMIUM TAX CREDITS THAT PEOPLE IN THE 20 SMALLEST STATES AND DC WOULD LOSE.
- 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. (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. 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). 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.
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; 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.
- The tax cuts for the top 400 would raise their incomes after federal income taxes by almost 3 percent.
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.