The other tax increase on saving

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THE OTHER TAX INCREASE ON SAVING

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The long-running battle over the 2001 and 2003 tax cuts has been resolved with the enactment of the American Taxpayer Relief Act of 2012, which allows some of the high-income rate cuts and related provisions to expire while permanently extending the remainder of the 2001 and 2003 tax cuts. Under the act, marginal tax rates on interest, dividends, capital gains, and business income rose by several percentage points for high-income taxpayers on January 1. Surprisingly, the advent of another tax on saving has largely escaped public attention.

Under the 2010 healthcare reform law, a 3.8 percent tax on interest, dividends, capital gains, and passive business income received by high-income households took effect on January 1. Congress named this tax the unearned income medicare contribution (UIMC), although it is widely referred to as the net investment income tax, a considerably more accurate name.

In this article, I discuss the enactment, structure, and economic implications of the UIMC. Despite its statutory name, the income to which the UIMC applies is not unearned and the tax is not a contribution to Medicare. Contrary to the bizarre myth circulating on the Internet, the UIMC is not a 3.8 percent tax on home sales. The UIMC falls on households with ample ability to pay, but it has the undesirable effect of discouraging saving. 

Click here to view the entire article as an Adobe Acrobat PDF. 

Alan D. Viard is a resident scholar at AEI. 

For a complete listing of all On the Margin articles, please visit: www.aei.org/onthemargin/.

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About the Author

 

Alan D.
Viard
  • Alan D. Viard is a resident scholar at the American Enterprise Institute (AEI), where he studies federal tax and budget policy.

    Prior to joining AEI, Viard was a senior economist at the Federal Reserve Bank of Dallas and an assistant professor of economics at Ohio State University. He has also been a visiting scholar at the US Department of the Treasury's Office of Tax Analysis, a senior economist at the White House's Council of Economic Advisers, and a staff economist at the Joint Committee on Taxation of the US Congress. While at AEI, Viard has also taught public finance at Georgetown University’s Public Policy Institute. Earlier in his career, Viard spent time in Japan as a visiting scholar at Osaka University’s Institute of Social and Economic Research.

    A prolific writer, Viard is a frequent contributor to AEI’s “On the Margin” column in Tax Notes and was nominated for Tax Notes’s 2009 Tax Person of the Year. He has also testified before Congress, and his work has been featured in a wide range of publications, including Room for Debate in The New York Times, TheAtlantic.com, Bloomberg, NPR’s Planet Money, and The Hill. Viard is the coauthor of “Progressive Consumption Taxation: The X Tax Revisited” (2012) and “The Real Tax Burden: Beyond Dollars and Cents” (2011), and the editor of “Tax Policy Lessons from the 2000s” (2009).

    Viard received his Ph.D. in economics from Harvard University and a B.A. in economics from Yale University. He also completed the first year of the J.D. program at the University of Chicago Law School, where he qualified for law review and was awarded the Joseph Henry Beale prize for legal research and writing.
  • Phone: 202-419-5202
    Email: aviard@aei.org
  • Assistant Info

    Name: Regan Kuchan
    Phone: 202-862-5903
    Email: regan.kuchan@aei.org

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