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The "help for health" tax
As Congress inches closer to approving a health reform bill, there's one last-minute addition to the legislation that's prompting much controversy. It's a new tax on "unearned income." What might that be? I'm glad you asked.
Here's how the legislation describes it:
"[I]ncome from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business not described in paragraph (2), ''(ii) other gross income derived from a trade or business described in paragraph (2)," and ''(iii) net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in a trade or business not described in paragraph (2)."
So, essentially an additional tax on investments and capital gains. House Speaker Nancy Pelosi was asked the question:
Reporter: So, capital gains?
Pelosi: "No, unearned income, whatever category that is."
Pelosi also described the new tax as "help for health," calling it a "health fee" on all those who have what she again described as "unearned income" that would keep Medicare solvent for years to come.
I get the feeling Pelosi cares not a whit where the money comes from or even knows where the money is coming from, as long as there's something that's paying the tab.
The investment tax or "help for health" as Pelosi calls it would apply to any person making $200,00 or more and any couple making $250,000 and up. The Wall Street Journal says:
The White House has embraced this investment tax because Big Labor opposed its preferred excise tax on high-cost health plans (the so-called Cadillac tax). So the White House decided to delay the excise tax, which meant losing $116.2 billion in revenue over the first 10 years. Voila, out came the 2.9% investment tax.
So for reasons of political expediency, Democrats will now impose a destructive tax that will permanently skew the incentives to work, save and create jobs. Come to think of it, that sums up this entire exercise.
Do you think this is the way we should be paying for Medicare? Or is this last-minute addition to the bill a horrible idea?
How can "unearned income" permanently skew the incentives to work, as Scott Jagow seems to be suggesting here. Unearned income is an escape from working for a living. Maybe Scott is putting this out as bait to test his readers' level of alertness.
Tax on unearned income reminds me a bit of the dot-com era and stock options. If an employee exercised company stock options, purchasing shared at a below-market price, he was on the hook (AMT) for the difference if he held them past the end of the calendar year. Sell within the calendar year and it's simple income. Hold onto the shares hoping for a capital gains tax rate and you got slapped with an AMT liability for the unearned (and unrealized) gain.
I had a few friends get caught on those horns before we figured out how to play the game. It gets worse if the value of the shares falls before you realize how big your tax bill is going to be... You end up selling most of the shares to cover the AMT liability, and then a real headache the following year when it's taxed as income but you get a bit back off of the previous AMT payment. eek!
Taxes on unearned investment income is not a new idea. Institutional investors already have to "pay" it in the form of a deferred capital gains tax. It works like this:
If you have unrealized gains on your investment portfolio, you have to allocate your deferred capital gains tax on your balance sheet. (you don't actually write a check to Uncle Sam, you just show the deferred tax amount as a long-term liability to be paid once the particular bond matures, sells or the stock certificate is actually sold) However, if your portfolio has unrealized losses, then you don't reduce your deferred tax amount, you simply wait until you're at a gain again before posting any more deferred tax.
I would imagine that for individual investors, they would actually have to write Uncle Sam a check for unrealized gains, but they could count it as a tax deduction if they have unrealized losses. (Where's the revenue in deferred taxes?) Naturally, I haven't actually looked at the provision in the bill so I can't be sure.
This not going to destroy our economy any more than the old capital gains tax rate did before it was dramatically lowered a few years back, which was a tremendous handout to a very small percentage of taxpayers.
Fewer than one in seven individual income taxpayers (families and households) reported taxable capital gains in 2006. (More than 86% of returns had no capital gains.) The 3 percent of returns with AGI over $200,000 reported 31 percent of AGI and 83 percent of capital gains; the 0.3 percent with AGI over $1,000,000 reported 15 percent of AGI and 61 percent of capital gains. Many more Americans accrue capital gains on corporate shares they hold within tax-deferred employer-sponsored retirement plans, but they do not pay capital gains tax on these gains, they will pay at wage income rates.
See IRS Statistics of Income, Individual Income Tax Returns, 2006, Table 1.4.
