At the first Democratic presidential debate, candidates promised to expand government benefits — from tuition-free college to paid maternity leave programs.
How to pay for these new benefits? Simple, they say, just tax the wealthy.
That idea may be a winner with the Democrats’ base, but the problem is that the math simply doesn’t work. There simply aren’t enough rich people to tax. If America is going to expand entitlements to European levels, government will have to greatly increase taxes on middle-class Americans, as well. In fact, we already have proof that entitlement expansions mean taxing the middle class — we need look no further than Obamacare.
Like today’s candidates, President Barack Obama famously promised not to raise taxes on the middle class or anyone who earns less than $250,000 annually.
But at least seven of the taxes included in the Affordable Care Act will directly hit this group.
Several of these middle-class tax changes impact tax-free accounts called Health Savings Accounts and Flexible Spending Accounts. Prior to the Affordable Care Act, Americans could use HSAs or FSAs to pay for over-the-counter drugs tax-free. The ACA prohibits the use of these accounts for over-the-counter drugs, which is effectively a tax increase.
The ACA also put a cap on how much employees can contribute to their FSAs ($2,500). If families have expenses that go beyond that cap, they won’t be able to benefit from using this tax-free account for those additional dollars. Some people have referred to this as the “Special Needs Kids Tax,” because families of special needs children can use FSA dollars toward special-needs education. Those families will face the most devastating effects of this tax increase.
The ACA increased the penalty for withdrawing HSA dollars for non-medical expenses. Before the law, the penalty was 10 percent. Now it’s 20 percent. This is a harsh punishment for saving too much and then later needing to spend that money on something other than health care.
The law changed the medical expense deduction from 7.5 percent of income to 10 percent of income, meaning people will have to pay taxes on more money used for health care. For example, someone with an income of $50,000 and $6,000 in health costs could deduct $2,250 prior to this change, but now he can only deduct $1000.
The deduction mainly benefits people with very high health costs, and it applies the same across all income brackets. That means people with relatively modest means and high medical costs will be the biggest losers from this change.
Certain middle-income Americans also face new taxes based on their behaviors and status. For example, there is a 10 percent excise tax on indoor tanning salons. Many people who own tanning businesses are in the middle class; this tax has significantly harmed their ability to do business.
Obamacare will also impose the so-called “Cadillac tax” on high-cost employer-sponsored health insurance plans starting in 2018. If the annual cost of a plan exceeds $10,200 for an individual or $27,500 for a family, then every dollar above the threshold will be taxed at 40 percent. This is without regard to the income level of the employee. These price thresholds are also tied to the consumer price index, which is typically much slower than premium growth. That means more and more people will become subject to this tax each year.
The individual mandate is perhaps the most infamous tax in the Affordable Care Act. In 2015 and beyond, the penalty for those who don’t have compliant health insurance is the greater of $325 per uninsured person or 2 percent of household income. The penalty will increase in 2016 and beyond.
For the most part, the burden of this tax will be borne by the middle class. The Congressional Budget Office estimates that this tax will generate about $4 billion in revenues in 2016 and $5 billion per year on average in future years. According to the CBO, approximately 69 percent of those who pay the mandate penalty have incomes below 400 percent of the federal poverty level ($47,080 for individuals and $97,000 for families of four in 2016, which is solidly middle class).
So while Democrats may promise to be the party of the middle class, actions speak louder than words. Their party is responsible for Obamacare, a significant tax increase on the middle class. That’s important to keep in mind for 2016.