WASHINGTON, D.C. — Citizens for Tax Justice on Tuesday came out with state-by-state analyses of how two proposals — a progressive Medicare tax and a limit on itemized income tax deductions — could help finance health care reform without hurting working families (hat tip to the Washington Post’s Daily Dose blog).
The progressive Medicare tax is the idea of Citizens for Tax Justice (CTJ), a public interest and advocacy organization focused on getting wealthy Americans to pay ”their fair share” of taxes. The limit on itemized tax deductions is the Obama administration’s idea. Both ideas are aimed at generating significantly more tax revenues from wealthy Americans, but the ideas also likely would raise the tax bill at least slightly for middle-class Americans.
The Medicare payroll tax — a flat 2.9 percent for both employees and employers — is the most important way the federal government pays for health care, the public interest group says. People who earn their livings by making returns on investments don’t pay Medicare taxes. CTJ proposes to make the Medicare tax a progressive tax — people earning and employers paying higher wages would pay a higher tax. And investors would have to pay the tax, too, the group proposes.
If such a tax were implemented by Congress, “the richest 1 percent of taxpayers in Ohio would have an average tax increase of $12,114 while the middle fifth of taxpayers would have an average tax increase of just $45,” Citizens for Tax Justice says in its Ohio analysis (pdf). The average annual income for the “richest 1 percent” of Ohio taxpayers is $967,901, according to the tax justice group. The average annual income for the “middle fifth” of Ohio taxpayers is $42,410.
As for limiting tax deductions, the Internal Revenue Service allows taxpayers to lower their taxable incomes by taking deductions for things like mortgage interest or charitable donations. Because the U.S. income tax is progressive — higher-income earners pay taxes at higher rates — rich taxpayers effectively deduct 40 cents for each dollar they spend on deductible expenses, while middle-class taxpayers get only 15 cents, Citizens for Tax Justice says.
So the tax justice group proposes limiting deductions to 28 cents per dollar. If enacted, this limit could increase income taxes for the richest 1 percent of Ohioans by $7,273, while the middle 20 percent of taxpayers in the state would see no tax increase, according to the group’s analysis. The average annual income brackets are the same for the limited deduction proposal as for the Medicare payroll tax proposal.
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[Illustration credit: Public domain clip art from FunDraw.com]