Increasing Medicare Tax on High-Wage Earners Could Help Pay for Health Reform and Strengthen Medicare’s Finances — Center on Budget and Policy Priorities
Increasing the Medicare payroll tax on high-wage earners would represent a sound and well-targeted way of paying for health reform. It would also improve the solvency of Medicare’s Hospital Insurance (HI) trust fund and thereby strengthen this critical program, which provides health coverage for 46 million seniors and persons with disabilities.
Hospital Insurance benefits in Medicare are funded primarily by payroll taxes on wages and self-employment income. Workers and employers each pay a flat 1.45 percent of wages, for a total of 2.9 percent. Unlike Social Security taxes, which are not imposed on earnings above a set level, Medicare taxes are collected on workers’ entire earnings. Although half of the tax is nominally paid by employers, most economists believe that employees ultimately pay the employer share as well through lower wages than they otherwise would receive. Self-employed workers pay the entire 2.9 percent tax but are allowed to deduct half of this amount for income tax purposes.