The Wonk Room

House Democrats Considering Surtax As Part Of Plan To Pay For Health Reform

House Ways and Means Committee Chairman Charles Rangel (D-NY)

House Democrats on the Ways and Means Committee are reportedly considering a two percent surtax that “would apply to individuals with adjusted gross income of more than $200,000 and couples over $250,000″ to help finance health care reform. The committee needs to “come up with $600 billion in new taxes to deliver on President Barack Obama’s goal of sweeping changes to the nation’s health care system” and this tax is just one option for raising the needed revenue.

Remember that in order to pay for approximately $1.5 trillion worth of health care reform, most progressives propose a mix of sources, including reducing excessive or wasteful spending in Medicare and Medicaid and modernizing the health system by implementing electronic health records and instituting payment reform. Additional revenue from the employer mandate and new taxes would generate more than $400 billion. This basket of pay-fors provides Congress with a menu of options, making fully financed health care reform more probable.

The proposed surtax would target adjusted gross incomes (AGI), or all earnings before subtracting for itemized deductions and exemptions. According to calculations from Citizens for Tax Justice (CTJ), about 2.4 percent of taxpayers would be affected by the proposed surtax.

The benefits of using a surtax to pay for reform are two-fold:

1) Because it is calculated directly from AGI, the new tax would not add greater complexity to the tax code.

2) It’s fairer than raising the income tax rate, because AGI is inclusive of income from capital gains and dividends, which are taxed at a much lower rate than work income.

Under the CTJ calculations, a household making about $250,000 would see an average tax increase of $536, while a household making $1.5 million would see an increase of almost $19,000. The tax would raise about $375 billion over the next decade (the House version is only looking for approximately $250 billion), and “would target those Americans who received the bulk of the benefits from the tax cuts enacted during the Bush years.”

However, unlike the Obama administration’s proposal to limit itemized deductions for the richest Americans in order to raise money or capping untaxed employee health benefits, a surtax doesn’t address already existing problems in the tax code. As Matthew Yglesias explained, “when possible, it’s better to raise money by broadening the tax base — curbing loopholes, deductions, and exemptions — than by simply raising the rates.” If a surtax is seriously being considered by Congress, it makes little sense to simultaneously dismiss the proposals to limit deductions or cap benefits out of hand.

– Pat Garofalo and Igor Volsky