Increase the Tax Rate for Medicare

Friday, 15 Mar 2013 07:46 AM

By Barry Elias

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Last week, I suggested a lower Social Security tax rate would enable the system to become more solvent over time. However, the opposite is true for Medicare.

Currently, the maximum tax rate for Medicare is 3.8 percent of income. This rate is much too low, given our healthcare expenditures are approaching 17 percent of income. Further, the demographics suggest these expenditures for the over-65 community will expand in the next few decades as the baby boom generation reaches retirement age.

Increasing the tax rate for Medicare would generate the requisite revenue to cover these future expenditures without impacting economic growth over the long term. Moreover, this increase would be more than offset by the reduced tax rate on Social Security taxes. This would reduce the seriously regressive payroll tax burden on lower and middle-income households, while providing a more solvent Social Security and Medicare program over the long term.

A more realistic tax rate for Medicare would be nearly 8 percent of income.

In my previous column on Social Security taxes, I recommended a 50 percent cut in this tax rate. Currently, the median household with $50,000 of annual income pays 15.3 percent in payroll taxes, or $7,650. While half of this amount is paid by the employer, most of this tax is reflected in a lower salary to keep the total employment expense down. Therefore, the employee bears nearly all of this tax, half directly and half indirectly in the form of lower compensation. Under my proposal, this household would pay 14.2 percent of income — 6.2 percent toward Social Security and 8 percent toward Medicare — for a total payroll tax of $7,100. This represents a tax savings of $550 for the median household.

We need to be thinking in more creative ways to solve the entitlement issue. The success of this proposal is predicated on a strong, stable medium of exchange that ensures a greater likelihood of purchase-power parity. Future columns will provide more details regarding this policy.

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