Currently Social Security has a tax on wages – not income (income includes investment income) – and yes that cap should be ended and indeed the tax and benefit calculations should be based on “income”. Meanwhile Medicare has a tax on wages – but is not capped – and ACA introduced a small tax on income for those with very high income. That investment income tax should start sooner than 2013 – but it was the one progressive idea that got past Obama.
The Medicare tax is current in total (ee share plus employer share) of 2.9% on wages received by an employee and on business or farming income earned by self-employed individuals. Starting in the year 2013, Medicare taxes will be increased to 3.8% for single person income above $200,000 of wages and expanded to cover investment income for higher-income individuals. Just as current self-employed persons calculate and pay their Medicare tax when filing their personal tax return as part of the self-employment tax, removing the cap on Social Security and adding investment income can be handled in the annual FIT filing.
The 2013 Medicare tax change of 0.9% additional tax on income over $200,000 is just an adjustment to the Medicare wage tax, but the ACA’s new investment income tax is called the Unearned Income Medicare Contribution Tax, and is calculated by taking the lower of net investment income for the year, and modified adjusted gross income over a certain ($200,000 if single, $250,000 if married) threshold amount. As an example if you have $50,000 more in modified AGI than your threshold and your investment income exceeds that amount, you only owe the 3.8% tax on $50,000. The hit to our poor single person million a year earner with $100,000 in capital gains income is an additional tax for Medicare of $11,000.
Which brings us to the Gang of Six idea of dropping the current “worldwide income tax with credit for taxes paid other countries” in favor of a “territorial tax” that taxes only activity in the US – presumable for both corporations and individuals. Does anyone believe the rich can not arrange their assets so that they own an off shore entity that holds their assets and does all their investing – thus avoiding the new Medicare tax?