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Tuesday, August 14, 2012

Tax medicare as income

To the receiver of Medicare it is insurance (very good insurance I might add).  That insurance has a value which can be calculated in a simple way (or complicated if one wanted to).  The government gives me that insurance like it gives me SS.  In the case of SS the govt computes how much I paid for it and  calculates the rest as income.  We should do the same for Medicare.  (I would do the same for any insurance paid for by an employer.  But that is another question.)

It is simple "fairness".  If you work you pay taxes on the income.  If you win the lottery you pay taxes on the winnings.  If the government gives you healthcare insurance, then you should pay taxes on it.

Notice that it is elegantly simple and also progressive.  This income would be taxed at the taxpayer's highest marginal rate.  Someone with enough income to pay at a higher rate would pay more.  I would pay (considerably) more.  However,  the poor (including a lot of our mothers) could add the value of their healthcare onto their income and still not be owing any income tax.

The proceeds should be placed in the Medicare Trust Fund.  It would go a long way to solving medicare's  long term problems and be quite progressive without the onerous label of "means testing" medicare.

If you have not heard about this proposal, that is because it would hit the biggest sacred cow in the American tax universe:  THE MIDDLE CLASS.

The reason both sides offer pixie dust solutions is that they want the public to believe that they are the ones who can solve the money problem WITHOUT hitting the middle class.  I do not believe it.

Of course the rich should pay more per person than anyone else,  they do so now, and they would pay even more with this proposal.  But you can't get it all from them.  The tax  loopholes uh "opportunities" that are owned by the middle class are huge:  untaxed healthcare, mortgage interest deductions, child deductions, and charitable contributions.  These are called tax expenditures and they are defended vigorously by all of the middle class's agents in Washington i.e. the politicians.

Of course, this is not a complete solution to the fiscal problem.  But it would be a significant step.


  1. I can support the concept of defining Medicare benefits as ordinary income and I think Wayne got all of the major points correct and stated them very well. I would prefer a more direct funding approach, but taxing Medicare benefits might actually have a chance of passing.

    My only issue with the post is one of language. For some individuals, Medicare benefits would be government “given”, for others it would be a “return” of previous tax payments.

  2. Tom, it's my understanding that what this plan would tax would be the "given". I also understand that the reason some of our Mothers would not be taxed would be that their highest marginal tax rate is zero.

  3. Wayne, clarification please. Are you suggesting that Medicare benefits are taxable only when they exceed an individual’s contributions to Medicare?

    1. Yes. I think that the part that you paid into Medicare is after tax dollars and has already been taxed.

      PS Since this is only "returning some of the benefit" it cannot come close to paying for medicare. But it would be big piece.

  4. OK, that removes the double taxation issues (which we accept with SS benefits). But, that does change my opinion regarding the chance of passing legislation to do this to “approaches zero”.