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Fun with math: Obama's health care 'tax increase' on the middle class

Mon, 04/12/2010 - 13:20 — Joel

Daniel Foster points to this Hill story, showing that Obama's health reform bill will actually sock the middle class with tax increases. The bolded parts are Foster's emphases:

Taxpayers earning less than $200,000 a year will pay roughly $3.9 billion more in taxes — in 2019 alone — because of healthcare reform, according to the Joint Committee on Taxation, Congress' official scorekeeper for legislation.

The new law raises $15.2 billion over 10 years by limiting the medical expense deduction, a provision widely used by taxpayers who either have a serious illness or are older.

Taxpayers can currently deduct medical expenses in excess of 7.5 percent of their adjusted gross income. Starting in 2013, most taxpayers will only be allowed to deducted expenses greater than 10 percent of AGI. Older taxpayers are hit by this threshold increase in 2017.

Once the law is fully implemented in 2019, the JCT estimates the deduction limitation will affect 14.8 million taxpayers — 14.7 million of them will earn less than $200,000 a year. These taxpayers are single and joint filers, as well as heads of households.

"Loss of this deduction will mean higher taxes for 14.7 million individuals and families making under $200,000 a year in 2019," Sen. Chuck Grassley (R-Iowa) told The Hill. "The new subsidy for health insurance would not be available to offset this tax increase for most of these households."

A little more math here is helpful, though: 14.7 million taxpayers will lose the deduction; they'll get hit with a collective $3.9 billion in new taxes in 2019. That means each taxpayer (and taxpaying household) will see an average tax increase of ... $26.

Clearly, socialism is bringing confiscatory tax rates to America.

Funny, though, Foster's excerpt skipped The Hill's line right after the Grassley quote:

The healthcare law contains tax breaks for individuals purchasing health insurance, but the breaks phase out for those making $88,000 a year.

So: The average tax increase of $26 a year will apply to families making between $88,000 and $200,000 a year. Even if you're on the low end of that scale, that average $26 increase will consume roughly three-tenths of one percent of your income!

I suppose that technically, this violates Obama's promise not to raise taxes of people making less than $250,000 a year. In reality, I'm not sure they'll notice it all that much. Unless organizations like The Hill continue to force readers to do the math to put these things in context -- and let Republicans needlessly scare the middle class.

UPDATE: The back of the envelope is no match for a calculator. I failed to carry a "zero" somewhere: Actual numbers are a $265 a year increase for those 14.7 million people. That's a bigger and more-noticeable number, to be sure. Still three-tenths of one percent of the $88,000-a-year income though. (How the hell did I make that mistake?)

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Mon, 04/12/2010 - 17:54 — Hamilton

Yea, what's the big deal

Why should any American expect any politician to keep their word. Hell, it’s only a couple of hundred dollars; that’s what the math today tells us and history shows how acurate our government is at hitting those finanical tagets as they spend our money. Of course, a couple hundred dollars give or take is a small price to pay for elite progressives to rightiously save the world. And I’m sure we will find some way to save a couple hundred dallors per tax payer when we get to cap and trade and immigrations. http//www.thehamiltonpost.blogspot.com

Mon, 04/12/2010 - 19:17 — Wry Mouth

My family will pay $265 a year for expanded healthcare if...

... you can reasonably assure me that that is actually what we will pay. You know, that there won't be any, what-do-they-call-them, um -- unintended economic pressures beyond the $265?

Bueller? Anyone?

Tue, 04/13/2010 - 07:04 — Khabalox

RE My family will pay $265

Actually, no, they won't. To be affected, you need to be claiming more than 7.5% of your AGI on health expenses, which translates to $6,000 to $15,000 per year. If you are just over that threshold (say at 8%), then you will see your taxes go up by less than the $265, and if you are closer to 10% or higher, then you will see your taxes go up by more than $265. This provision doesn't affect that many people - less than 5% of the population - so it's unlikely that you will see your taxes go up because of this (assuming you even fall in the $80-200k income range).

Tue, 04/13/2010 - 17:07 — RobbL

Re: My family will pay $265

Yeah, this is Republican fear-mongering. You've got to be spending a lot of money on health expenses to even be allowed to claim a deduction for those expenses. Usually chronic/severe illness. Even then, if your job offers any kind of Flexible Spending Account you can deduct reasonably foreseen medical expenses on the front end. Instead of freaking out about a shrinking tax deduction for a very small percentage of the population, Republicans should be working to expand FSAs so that they can be funded outside of company-run plans and allowing FSA funds to roll over from year-to-year. But why work for something that can benefit everyone when you can scare people?

Tue, 04/13/2010 - 15:08 — Dr. Zaius

RE My family will pay $265

Gee. Thanks for the explanation, K. It all sounds so simple and totally worth it when you break it down like that.

Tue, 04/13/2010 - 20:14 — Wry Mouth

RE My Family, the $265, charity and tax burden

No; I'm serious. We don't mind chipping in for the general welfare, along with our usual private charitable giving (since I do both, I don't know whether to call myself a "progressive" or a "conservative" so I just usually go with "to hell with it"). Khab -- that's the sort of thing that chaps my hide. They can't just say, "everyone pay $10," or "every household chip in a hundred bucks." No. It has to be layer upon layer of economic bullshit.

As for me and mine? Well -- about 1 in 3 dollars we earn, gross, goes to the federal government, along with another chunk to the government of CA, which is worse than giving money to the local crack fiend with the cardboard sign proclaiming his-or-her homelessness and hungriness. At least the crack fiends have a pitiable reason to beg for my money. The CA government should know better.

And me and mine are "doing it right," by the way. No off-shore tax shelters; we just file joint married, claim as many business deductions as we can, and slowly, slowly, go under a little deeper every year.

It's the American dream, as envisioned by the federal government.

I move that "16 Tons" be made the National Anthem for the 21st Century.

"There's a reason we don't quote Hitler when we discuss highway spending. It just puts too much noise into your signal." Joel, 2010

Tue, 04/13/2010 - 22:15 — Dr. Zaius

RE My Family, the $265, charity and tax burden

Bravo, Wrymouth.

I could care less about something being characterized as a "Republican fear-mongering." What matters is that government, by nature, complicates every transaction in life — largely for no good reason.

Robb says:

Republicans should be working to expand FSAs so that they can be funded outside of company-run plans and allowing FSA funds to roll over from year-to-year.

Conservative Republicans have been advocating that for years, to very little avail.

One of the most basic health care reforms is devising ways to unwind the public/private morass we've created in health care payment and delivery. I think I've mentioned that a few times around here.

We're going in the wrong direction, exponentially via ObamaCare. The very idea of arguing over which tax break goes to which person at what income level and family circumstance and for what amount — if you file as this or that and deduct this particular item and claim yourself in this fashion — is pretty good proof of that.

Ridiculous.

Tue, 04/13/2010 - 22:25 — RobbL

Re: Advocating vs. Doing Something

Conservative Republicans have been advocating that for years, to very little avail.

Remind me again who controlled congress for the better part of 12 years, and the White House for six of those twelve? Republicans have zero credibility on fiscal issues.

Wed, 04/14/2010 - 08:11 — Khabalox

RE Tax Burden and FSAs

They can't just say, "everyone pay $10," or "every household chip in a hundred bucks." No. It has to be layer upon layer of economic bullshit.

That was what I was trying to peel away. My point is that the $265 is not a realistic number because:

  • it only applies to a small subset of the population
  • it is a mean number, and the actual number for any given individual/family will likely be much different depending on their situation

The practice of talking about figures as "average per citizen or tax payer" has it's pros and cons. It does bring these numbers into better perspective (people don't really have a concept of what $1 billion is), but they are also a gross oversimplification. It gives ammo to the left to say, "Look, it's only $265, it's not onerous." And it gives ammo to the right to say, "You're going to pay $265 more in taxes each year." Both statements aren't completely true.

No off-shore tax shelters

This reminded me of the Exxon tax story. They reported on their 10-k filing with the SEC that the IRS owed them $46 million for 2009, while they paid over $15 billion in foreign income taxes. After the story broke, Exxon was quick to point out that this is an accounting trick, not their actual tax bill (which they refuse to disclose, like most corporations). Which, as the article explains:

... leaves the figures in ExxonMobil's 10-K largely unexplained: Even if the firm overpaid taxes and earned a refund, it still wouldn't show up as a zero or a positive revenue in cashflow—unless the paid tax liabilities are concealed elsewhere in the report. And it doesn't explain why ExxonMobil's figures are so out of wack with its peer corporations, like Wal-Mart, cited in the original story above, or Chevron, which listed $200 million in US income tax on the same line in its 10-K, Forbes reported.

----

we just file joint married

My wife and I filed separately, so I got shafted on my Roth IRA and have to withdraw all my contributions from last year. :(

On FSAs: I agree with Zaius that they should be expanded, and I'm disappointed that the HC bill didn't do that (in fact, IIRC you can't use them to pay for OTC meds now, is that right?), just as I was disappointed that his party only paid it lip service when they were in power. My wife and I are healthy, as are our two kids, but we easily max it out with all the kids checkups in the first 2 years of life, along with some dental work for us.

Wed, 04/14/2010 - 15:12 — crywalt

FSAs

I think FSAs are pretty stupid. You can set aside some part of your salary pre-tax to spend on medical costs, which assumes you have some vague idea of how much you might need over the course of the year. That doesn't really do much except "give" you another, what, thirty percent or so, depending on your tax bracket. It sounds great on paper, if you're a politician -- instead of saying "I want to SPEND a million dollars on health care" you simply deign not to TAKE that million dollars in the first place, requiring that it be spent on health care. It's an accounting dodge which is really only cosmetic, and as such exemplifies the way politics is done these days (promoting tax breaks instead of just taxing properly the first time around).

As a family with significant medical expenses -- just barely enough to make us have to calculate if we qualify to claim them on our taxes -- I can state that the FSA is a pain in the ass, like many expansions of choice in insurance and health care. The fact is, I have no idea at all how much to put into it every year and working it out is a bitch and a half. And I have a BS from an engineering school and a wife with a BS and an MS from the same school. I can only imagine what a headache it is for someone whose last math class was junior year of high school thirty years ago.

(My poor wife and I went batshit over trying to figure out the pros and cons of the various dental plans offered by her company, too, by the way.)

Incidentally, our FSA can be used to cover over the counter things. I've bought blood glucose testing supplies with it, among other stuff. I don't know that it would cover, for example, cough suppressant or pills for hay fever.

Thu, 04/15/2010 - 07:43 — Khabalox

RE FSAs

Yeah, there are parts of FSAs that are irritating. The fact that you have to make up-front funding decisions and they don't roll over is pretty idiotic. But, they are a good way to save a little money. Here's how I'd like them to work:

  • Set the limit much higher (e.g. 10-20k). See below on the new rules for FSAs under the HC bill. I just read the wikipedia article on FSAs and noticed that employees have access to the entire annual amount at the beginning of the year, so they can use it all up front and if they are subsequently fired or quit the employer is on the hook. On the other hand, the employer gets all unused funds (which amounts to an average of 14%) so I guess it balances out in favor of the employer
  • allow funding decisions to be made at any time - e.g. I can start out contributing $100 per paycheck in Januarya, then cut it back to $50 in June (or increase).
  • Funds in the account not used in year N get carried over to year N+1. I'd like to pay for Lasik out of the account (assuming that's allowed), but I won't have enough in any single year because of other medical expenses.

As a family with significant medical expenses -- just barely enough to make us have to calculate if we qualify to claim them on our taxes -- I can state that the FSA is a pain in the ass, like many expansions of choice in insurance and health care. The fact is, I have no idea at all how much to put into it every year and working it out is a bitch and a half.

I don't want to pry into your medical privacy, but this doesn't make sense to me. If you have enough medical expenses to worry about claiming them on your taxes (i.e. $7500-10,000) then wouldn't you want to contribute the max to your FSA (or does your employer not have a max - for us it's only a few thousand)?

Incidentally, our FSA can be used to cover over the counter things.

Not for long.

Under the current rule, employers set the limit on how much their employees can set aside for FSAs. But by 2013, the law limits the accounts to $2,500.

This cap is not expected to constrain most people, because the average amount in FSAs is $1,400, said Bob Natt, the CEO of PayFlex, a company that manages employee benefit programs.

FSAs can be used to pay for doctor's bills, prescription medicine and over-the-counter items such as pain relievers, antihistamines, acne drugs and wart removers. But under the new law, these over-the-counter drugs would no longer be eligible FSA expenses after this year.

Thu, 04/15/2010 - 08:08 — crywalt

Max FSA

Contributing the max to your FSA makes sense if a) your medical costs aren't voluntary (e.g. if you stop taking medication you die) and b) there are no other uses in your household for that money. I could, conceivably, change medications, or stop taking them, without immediately croaking. Therefore they're not strictly necessary the way, say, a mortgage payment or car insurance might be. (Also, it's only relatively recently that my medications have settled down into a routine; for the past few years we've been trying different things.)

If your household budget has plenty of leeway -- where you're not scraping by month to month -- FSAs might be okay. If you have no idea if you can cover your basic bills in any given month, they kind of suck, because that money comes out of your paycheck regardless of new circumstances that might arise -- "Crap, my car's engine seized and I need a new car right away!" -- and can't be reallocated to anything but medical expenses. Meanwhile if your medical expenses take a sudden upturn, they'll quickly swamp your FSA no matter how much you put in it. (One night in the hospital without insurance will probably wipe out most people.)