Increase the Payroll Tax Rate for Medicare Hospital Insurance

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2021–
Change in Revenues  
  Increase rate by 1 percentage point 50.4 78.8 82.0 85.2 88.8 91.6 95.0 98.4 101.9 105.4 385.2 877.5
  Increase rate by 2 percentage points 99.8 156.0 162.2 168.7 175.7 181.3 188.0 194.8 201.4 208.5 762.4 1,736.3

Data source: Staff of the Joint Committee on Taxation.
This option would take effect in January 2021.
An offset to reflect reduced income and payroll taxes has been applied to the estimates in this table.

Hospital Insurance (HI) benefits provided under Medicare Part A are primarily financed through the HI payroll tax, which is 2.9 percent of total earnings. For employees, 1.45 percent is deducted from their paychecks, and 1.45 percent is paid by their employers. Self-employed individuals generally pay 2.9 percent of their net self-employment income in HI taxes. Workers with higher earnings are also subject to a surtax on all earnings above a certain threshold.

This option consists of two alternatives. The first alternative would increase the HI tax on total earnings by 1 percentage point. The second alternative would increase the HI tax on total earnings by 2 percentage points. Those rate increases would be evenly split between employers and employees. The rate paid by self-employed people would rise by the full amount of the increase. Under both alternatives, workers with higher earnings would still be subject to the surtax.