Our view: Republicans — and the country — are better off by keeping Obamacare’s tax on investment income of the rich

As a candidate for president, Donald J. Trump rejected hardline conservative orthodoxy on taxes, embracing a more populist view that had hedge fund managers taking a "hair cut" on so-called "carried interest," the lower income tax rate provided to investment managers (23.8 percent compared to the top rate of 39.6 percent). That particular proposal seems to have faded away since President Trump took office, but Republicans now find themselves at an important crossroads over tax policy with similar implications — what to do about the Affordable Care Act's tax on the investment income of the wealthiest Americans.

Republicans are in charge. So why can't they deliver on healthcare?

Repealing the Affordable Care Act, or Obamacare, was supposed to be easy for Republicans once they took control of Washington, Despite that repeated promise, it's proven anything but.

As taxes go, it's a beauty. Used to finance the Medicaid expansion, it's relatively modest at 3.8 percent, applies to net investment income (like dividends, interest or capital gains), is paid only by individuals making more than $200,000 or families more than $250,000 in adjusted gross income, and it mostly socks millionaires — an early analysis of repealing the tax (along with an Obamacare's even smaller tax on high-income earners) found that 79 percent of the benefit would go to people earning more than $1 million per year with none going to people earning less than $200,000, of course. It's a major reason why opponents of the Republican "repeal and replace Obamacare" plans can rightly claim they are mostly a tax cut for the rich and a reduction of health care for the poor and working class.


But what if Senate Majority Leader Mitch McConnell took the investment income tax repeal off the table? Conservatives would be furious — the usual suspects like Club for Growth are already making loud and threatening noises about such a move — but it might spare moderates like Nevada Sen. Dean Heller from becoming political road kill in 2018. Perhaps more significantly, it would demonstrate that at least some in the GOP were paying attention to Mr. Trump's America First campaign theme about supporting the needs of Main Street and not necessarily Wall Street. It might also show the party is a lot more serious about deficit reduction than their policy proposals have demonstrated to date.

Critics claim that taxing investment income kills economic growth, but, as President Trump likes to point out, there's been quite a run-up in the stock market since he was elected — a bigger first 100-day "bump" than President Bill Clinton, Barack Obama, George W. Bush or Ronald Reagan experienced — and that's been with most of his economic agenda stymied in Congress. Job growth has been decent as well with June's numbers better than expected and an overall unemployment rate of 4.4 percent and even a slight inching up of the labor participation rate. All that prosperity (with the lion's share going to top-earners, by the way) happened despite Obamacare's tax on capital gains and other investment income, which has been in effect since 2013.

Senator McConnell knows the repeal-and-replace movement has been stopped dead in its tracks. So do many in his party who heard the complaints of angry constituents fearful of losing health insurance coverage in recent days. Shoring up the ACA is the only viable path forward. Mr. McConnell more or less admitted that in a talk with Rotary Club members in Kentucky last week. That means working with Democrats and maintaining sufficient revenues to keep health insurance companies in their markets. That's not some tactical victory for the Democratic Party, it's just the reality of the "Rubik's Cube" of health care financing — unless Republicans are willing to deny coverage to tens of millions of Americans or adopt a single-payer strategy, the complex policy compromise that is the ACA is simply all that's available.

Meanwhile, Mr. McConnell and his fellow Republicans would be better off taking up other pro-business causes such as tax reform or public infrastructure investment to spur economic growth. The richest Americans will be just fine, as the top 1 percent have pocketed 85 percent of the income growth since the Great Recession, according to the Economic Policy Institute. President Trump should be comfortable with this pivot as well. He may be a billionaire, but it wasn't billionaires who got him elected, it was working class Americans in states like West Virginia who frequently depend on Medicaid, food stamps and Social Security disability payments. They are not the ones deserving of a "hair cut," the folks who travel by private jet and chauffeured limousine are.

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