Medicare Tax: Should High Earners Pay More? See What People Think
Medicare is a vastly popular and relied upon program in the U.S. According to the Center for Medicare Advocacy, 65,103,807 people were enrolled in Medicare as of September 2022.
Payroll taxes are a primary way Medicare is funded, and there long has been a debate over whether people earning above a certain threshold should contribute more taxes to the program than lower earners do.
A new poll by GOBankingRates found that people overwhelmingly want wealthy folks to pay more to save Medicare, which is expected to deplete its trust fund in the next decade.
As of April 6, the poll found that 76% of people think that the government should raise the Medicare tax on high earners. Sixteen percent said it should not and the rest said they were unsure.
Given that most people are in favor of higher earners contributing more, GOBankingRates consulted a Medicare expert and a finance expert on whether they agree and what a reality where higher-income earners pay more would look like.
The Richer Already Pay More, Technically
One thing that people may not know and which is important to recognize is that wealthy people already pay more to Medicare.
Take Our Poll: Do You Think the US Should Raise the Medicare Tax on High Earners To Help Save the Program?
“They pay more in three ways,” said Terrell Stauffer, CFP at Wealth Enhancement Group. “Medicare tax of 2.9% — split between employees and employers — doesn’t have a cap like Social Security, so higher-income earners pay more the more they make: an additional Medicare tax of 0.9% is assessed on anyone making over $250,000 in joint income or $200,000 as a single filer.
“Again, this has no cap; net investment income tax of 3.8% is applied to the lesser of the total net investment income or the modified adjusted gross income (MAGI) above the threshold of $250,000 for 2023.”
Piecing this all together, what does Medicare funding look like for a high earner?
“A couple making $500,000 in 2023 would pay $7,250 in Medicare tax plus $2,250 in additional Medicare taxes plus $1,900 of net investment tax, assuming they only have $50,000 in net investment income,” Stauffer said. “This is a total of $11,400 in Medicare taxes.”
A Progressive Tax Rate and Other Changes To Protect Medicare
Because high earners make more money and pay the same tax rate on Medicare as lower-income earners, they’re technically paying more to fund Medicare. But that’s not all that people want to see happen. As our poll indicated, people want the rate at which higher earners are taxed to be higher. What would this look like?
“Change the additional Medicare tax to a progressive tax rate that increases to 1.5% at $1 [million], 2% at $5 [million], and 2.5% at $10 [million],” Stauffer said.
To protect Medicare, Stauffer also recommends implementing an income-related monthly adjusted amount (IRMAA) charge on Part A that mirrors Part B IRMAA charges but at 50% of the amount.
“As it stands, an individual can sign up for Part A while covered under a group plan,” Stauffer said. “In this case, Medicare hospital insurance becomes secondary coverage. If we prevent people from signing up for Medicare Part A while covered under a group plan, that will eliminate the small amount of secondary insurance claims’ payouts and reduce administrative costs.”
The Argument Against Taxing the Rich at a Higher Rate
There is an argument against imposing a higher tax rate on higher earners to keep Medicare solvent.
Kathe Kline, founder of CertifiedMedicareAgents.com, is opposed to high earners being taxed more for Medicare in part because high earners already pay more for their Part B premiums and their Part D premiums.
“Most people pay $164.90 per month in the year 2023 for Part B — the part of Medicare that covers doctor visits, chemotherapy, etc. Drug Plans (Part D) are administered by private insurance companies so those costs vary,” Kline said. “But those income earners in the highest bracket ($500,000 or more) pay $560.50 per month for Part B plus an additional $76.40 per month for their drug plan.
“Those high-income earners are already paying $5,664 per year more than what most people pay for Part B. This extra tax is in addition to the tax they paid prior to receiving Medicare.”
Also, Kline points out, Part B and Part D premiums are in addition to any Medicare Supplement or Medicare Advantage premiums that people must pay.
“The real problem isn’t going to be solved by increasing taxes on high-income earners,” Kline said. “The problem is that we are offloading the Medicare program to private insurance companies via Medicare Advantage. According to the Kaiser Foundation, ‘Medicare pays more to private Medicare Advantage plans for enrollees than their costs would be in traditional Medicare’.”
Could We See a Higher Tax Rate Enacted?
Will the government ever raise the tax rate on higher earners? The experts we consulted are not aligned in their opinions.
“I believe that yes, a new/higher tax might be enacted someday,” Kline said. “High-income earners might be forced to pay more Medicare tax.”
Stauffer doesn’t think a higher tax rate will be imposed on the wealthier because “politicians are incentivized to keep the status quo and maintain voter happiness.”
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