Let’s start small: Medicare funding

I’m going to get in trouble for this one, but here goes:

Why do we fund Medicare with a payroll tax?

With Social Security, the logic is readily apparent:  the program is designed to replace earned income, since that’s the income you lose when you retire.  The formula is based off one’s earned income, up to the ceiling, and with decreasing accrual rates at the various bendpoint, and one is meant to believe that you’re paying your own way with your contributions.

But with Medicare?

Not only do retirees in aggregate receive far more in benefits than they paid in taxes during their working lifetime, but everyone gets the same benefit (when measured as insurance premium costs, not actual payouts), rich and poor alike.  There is simply no way in which one “earns” one’s Medicare entitlement by “paying premiums” during one’s working years; one simply paid taxes.

To a certain extent, the government recognizes this fact:  the ceiling for the Medicare component of the FICA taxes was removed in 1994.  And, with the ACA, of course, devilishly complicated surtaxes were added for both earned and investment income of high earners.

But the very fact that we have a special payroll tax for Medicare produced these calculations.  Why not simply fund Medicare via a portion of the general income tax?