Unless President Obama and Congress take action soon, Taxmageddon will hit on January 1, 2013. Taxmageddon is a $494 billion tax increase for 2013 alone. It is made up of several expiring tax policies and the implementation of new Obamacare tax increases that all kick in at the start of next year.
Five of Obamacare’s 18 new taxes begin in 2013, and they would raise $23 billion for the year. Heritage tax policy expert Curtis Dubay explains that two of them will be especially harmful: an increase in the Medicare payroll tax and a new medical device tax.
Starting January 2013, Obamacare increases the Medicare payroll tax from 2.9 percent to 3.8 percent for individuals with income over $200,000 a year ($250,000 for couples). This increase will hinder economic growth and deter job creation for small businesses.
Moreover, Dubay writes, the tax “is a dedicated tax to fund Medicare Part A. Obamacare, however, uses the new revenue raised from these increases to fund new spending created by the law. This breaks another long-held precedent that the revenue that payroll taxes raise goes only to programs that Congress created the taxes to fund.”
Next year, Obamacare also applies the increased Medicare payroll tax rate to investment income for the first time, including capital gains, dividends, rents, and royalties. Dubay states, “The application of the 3.8 percent [hospital insurance] tax to investment income will have an even more deleterious impact on job creation because it will reduce investment that is essential for job creation.”
Taxmageddon includes a rise in the capital gains tax from 15 percent to 20 percent, in addition to the 3.8 percent from Obamacare, which brings the capital gains tax rate to 23.8 percent, a 59 percent increase as of New Year’s Day.
In addition, beginning in 2013, Obamacare imposes a 2.3 percent excise tax on the sale of commonly used medical equipment. This tax has the potential to significantly affect employment and medical innovation. Device manufacturers will either pass on the tax as higher costs to consumers or absorb it themselves. If they pay the costs themselves, they will likely have to recoup this cost by decreasing labor costs.
In fact, this is already happening. One company already decreased its labor force by 5 percent in preparation for the tax. Dubay explains, “Many of those job losses will occur in the company’s research and development department. This will stifle the company’s ability to innovate to create new products or improve existing products.”
Congress should stop all of Taxmageddon to prevent the staggering blow it would deliver to taxpayers and the economy. In order to prevent the devastating impact of Taxmageddon in full, Congress should delay the Obamacare tax increases as long as it can until it can repeal the entire law.