Institute for Research in Economic and Fiscal issues

IREF Europe - Institute for Research in Economic and Fiscal issues

Fiscal competition
and economic freedom

How will Obama finance healthcare?

Despite all the troubles he has to face, President Obama keeps renewing his commitment to move forward with his plan to reform healthcare. His intention is to partly finance the reform with tax increases (there will also be cost savings in healthcare programs) and, not surprisingly, to shift the general burden a bit more to the wealthiest. Looking more closely at the proposal, however, it appears that it will increase one of the most economically harmful taxes: the tax on savings.

According to the plan, households with incomes above $ 200 000 ($ 250 000 for married couples), will see the base of their Medicare payroll tax of 2.9%, which so far includes only labor income, broadened to include other revenues such as interest, dividends and capital gains.

True, this change will concern only households with incomes above $200,000 but, in 2007, those households accounted for 47 % of all interest income, 60 % of all dividends, and 84 % of all net capital gains. In other words, the plan will heavily hit the main source of investment financing. The natural question to ask is of course whether the US can afford to disregard investment incentives and growth? The answer should be obvious.

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