Tax Lawyer's Blog

President Obama’s healthcare plan raises the 1.45% Medicare payroll tax to 2.35% for families with more than $250,000 of earned income. 

Spread-the-wealther Timothy Noah of Slate wonders why Republicans aren’t making a bigger stink about this tax increase:

Maybe the recession has made solicitude on the part of the rich less plausible to the electorate. Maybe squawking too loudly about a tax increase affecting people earning more than $250,000 a year would be hard to square with Republicans’ populist cavils about Medicare cuts.

Maybe Republicans figure their wealthier constituents will flee the tax by declaring themselves to be S corporations, a payroll-tax dodge¹ made famous in 2004 by John Edwards. (For this reason, and because it raises more revenue, I prefer the House’s millionaire surtax.) For whatever reason, the proposed Medicare payroll tax increase has been mostly a nonissue for Republicans.

Dare we call that progress?

Mr. Noah is right that Republicans should be upset about this tax increase, but on everything else he’s a few cubits short of an Arc.

Naked confiscation of the wealth of others is regress, not progress. It is anti-evolutionary² and is probably the reason Darwin is rolling over in his grave as I type.

To give you an idea of just how confiscatory this new tax is, here are two examples. 

Example 1: Taxpayer earning $500,000 in 2011 would have to pay an additional $2,240 calculated as follows:

Under Current Law

• Medicare payroll tax $1.45% x 500,000 = $7,250

Under Obamacare

• Medicare payroll tax up to $250,000 – 1.45% x 250,000 = $3,625
• Medicare payroll tax on earned income over $250,000 – 2.35% x $250,000 = $5,875
• Total Medicare tax $9,500

Tax Increase

• 9,500 – 7,250 = $2,250

Arguably, a modest increase for someone making a half a million dollars a year.

But now let’s crunch the numbers for one of  those uber-bonused Wall Street execs and see what the damage is.

Example 2: James Dimon of J.P. Morgan Chase made $20,000,000 in 2008. Under Obamacare he would have had to pay in an additional $175,125 in Medicare taxes calculated as follows:

Under Current Law

• Medicare payroll tax $1.45% x 20,000,000 = $290,000

Under Obamacare

• Medicare payroll tax up to $250,000 – 1.45% x 250,000 = $3,625
• Medicare payroll tax on earned income over $250,000 – 2.35% x 19,750,000= $464,125
• Total Medicare tax $467,750

Tax Increase

• $467,750 – 290,000 = $175,750

Under current law, assuming Mr. Dimon remained employed by JP Morgan for ten years at the same rate of pay, he will have personally paid into the Medicare system during that time period $2,900,000. But that apparently is not enough for Messrs Obama, Reid and Noah. They think he should have to pay an additional $1,750,000 in Medicare taxes.

If that isn’t blatant confiscation, I don’t know what is?

Mr. Dimon will never use that much government funded healthcare in his life. In fact, he probably has his own healthcare and won’t use Medicare at all. Yet Obama and Reid think it’s fair to make him pay more than $5,000,000 for the healthcare of others.³

Footnotes:

¹  It would be helpful if Noah were more well-versed in the intricacies of corporate law. Then he would understand that there is a difference between distributions from corporate profits and the payment of wages for services rendered. While it is true that some people choose the S corporation form of doing business to avoid paying their fair share of social security and medicare taxes, most S corporation shareholders invest substantial funds in their own businesses and are entitled to receive a reasonable rate of return on their investment. In addition, most S corporation shareholders rely on the labor of others to realize a profit and the distribution of that profit is not and should not be subject to social security taxes.

²  In the jungle if one beast has what a second beast wants, the second beast, if he is strong enough, takes it from him.

³  The Timothy Noahs of the world are the very same people who were outraged because, they claimed, George W. Bush’s Patriot Act had taken away so many of their sacred liberties. I bet Mr. Dimon (and Mr. Noah, for that matter) would let Homeland Security tap his phones 24/7 if it would save him $1,750,000.

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