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.
Alan D. Viard is a resident scholar at AEI.