Medicare Tax Increase to Help Fund Health Care Reform Will Affect Few Taxpayers

As we explained earlier today, the Congressional Budget Office estimates that only 1.2 percent of the population will pay a penalty for failing to get health coverage under health care reform.  A different provision of health care reform — the Medicare tax increase to help fund the reform — will similarly affect very few taxpayers.

Under this provision, only individuals with incomes over $200,000 and couples with incomes over $250,000 will see their Medicare taxes rise.  They will pay an additional tax on earnings above those amounts at the rate of 0.9 percent, and a new 3.8 percent Medicare tax on unearned income like capital gains, dividends, and interest.

As this chart shows, 97.6 percent of households would be entirely unaffected, according to estimates from the Tax Policy Center.

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The 2.4 percent of taxpayers who will face these taxes have high incomes.  Moreover, their tax increases will be relatively modest. As the chart also shows, for people in the $200,000 to $500,000 range, the revenue increase will shave their after-tax income by just two-tenths of 1 percent on average.  Even people making over $1 million a year will face an average reduction in after-tax income of only 2 percent.

As we’ve previously explained, the Medicare tax increase — along with other elements of the health care reform law — help ensure that the reform is fiscally responsible, modestly reducing the deficit while expanding health insurance for tens of millions, according to the Congressional Budget Office.