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.
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.
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. If left in place, they likely would generate more than $300 billion over the next decade, according to past estimates.
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, dropping the top tax rate on capital gains and dividends to 20% from 23.8%. That decision means people 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 past 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.