Alan Viard on the Unearned Income Medicare Contribution

by Reihan Salam

Remember our brief discussion of Steven Teles’s “Kludgeocracy: The American Way of Policy“? One of Steve’s core insights is that the multiple veto points that are a central part of our system of government don’t work quite as intended. That is, rather than restrain the growth of government, multiple veto points create strategic redoubts from which entrenched insiders can extract rents or advance their interests without much scrutiny:

A superficial analysis would predict that this proliferation of veto points would lead to inaction, generating a systematic libertarian bias. But in practice, every veto point functions more like a toll booth, with the toll-taker able to extract a price in exchange for his or her willingness to allow legislation to keep moving. Most obviously, the toll-taker gets to gobble up pork barrel projects for an individual district in exchange for letting legislation move onto the next step. This increases the cost of legislation, but as John Ellwood and Eric Patashnik argue, it might be a reasonable price to pay for greasing the wheels of a very complicated legislative machine.

Unfortunately, the price of multiple veto points is much larger than an accounting of pork barrel projects would suggest. First, many of our legislative toll-takers have a vested interest in the status quo. In exchange for their willingness to  allow action to proceed, they often require that legislation hold their favored programs harmless. Consequently, new ideas have to be layered over old programs, rather than replacing them  — the textbook definition of a policy kludge. Second, the need to generate consent from so many actors makes attaining any degree of policy coherence difficult, at best. Finally, the enormous number of veto points that legislation must now pass through gives legislative strategists a strong incentive to pour everything they can into giant omnibus legislation. The multiplication of veto points, therefore, does not necessarily stop legislation from happening, but it does considerably raise its cost and, more importantly, its complexity. [Emphasis added]

This is an excellent description of the Affordable Care Act, an enormously complex omnibus law that is still not very well understood. Had the Affordable Care Act been divided into, say, ten or twenty discrete legislative proposals, one can imagine that some would prove far more attractive than others. For example, an ambitious Medicare overhaul would have been quite difficult to pass. An ambitious Medicaid expansion might have been somewhat less so, and something like the creation of subsidized insurance exchanges might have fallen somewhere in between. The problem is that the coverage expansion provisions were expensive, and so the promise of Medicare savings were an important political part of the larger architecture. But the promise of Medicare savings was not quite enough to create the appearance that the legislation would be deficit-improving, and so we had the CLASS provisions and a number of other taxes, including the Unearned Income Medicare Contribution — a measure that in itself might have proven controversial, yet which has gone almost entirely ignored.

Fortunately, Alan Viard has a column in Bloomberg View explaining the Unearned Income Medicare Contribution and how it is likely to shape the larger tax policy landscape:

Scheduled to take effect on Jan. 1, the tax, which was adopted as part of the 2010 health-care law, is a 3.8 percent levy on interest, dividends, capital gains and passive business income received by taxpayers with incomes exceeding $200,000 (or $250,000 for couples).

Because the new tax was added to the health-care law late in the process without congressional hearings, it received little attention at the time. With only a few weeks left before it takes effect, it remains largely unknown.

Its obscurity has allowed bizarre myths to circulate on the Internet — despite what you may have read online, the tax is not a 3.8 percent levy on home sales.

One problem with the unearned income Medicare contribution tax is the name Congress chose for it, which is a triple misnomer. The income that will be subject to the tax isn’t unearned — it is earned by savers who receive market rewards for delaying consumption and providing funds to finance business investment.

Also, because the proceeds will be paid into the general treasury, the tax will have no financial link to Medicare. And, of course, the tax will be a compulsory payment, not a voluntary contribution.

Viard goes on to explain the complexities of this new tax and its potential impact on savings and investment.