Eliminate the Net Investment Income Tax

The Patient Protection and Affordable Care Act of 2010 (also known as the Affordable Care Act or Obamacare) introduced the net investment income tax (NIIT), a 3.8 percent income tax on certain types of investment income—including capital gains, dividends, interest, passive business income, and others—of high-income taxpayers. The NIIT applies when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for joint filers. The thresholds are not inflation-indexed.

This option repeals the net investment income tax. Repealing the NIIT would increase incentives to save. Domestic saving would rise, and more of the returns to domestic investment would flow to Americans; however, the larger budget deficit would increase federal government borrowing, and more interest payments would flow to foreigners. The net effect is a slight rise in GNP.

On a conventional basis, this option would increase the primary deficit by $444.9 billion over the budget window. Long-run GDP would be unchanged, while long-run GNP would rise by less than 0.05 percent. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be higher than baseline, reaching 179.7 percent by 2056.

On average, in 2036, taxpayers would see increases in their after-tax incomes of 0.2 percent. The top quintile of taxpayers would experience a 0.4 percent increase, whereas the bottom quintile would experience a 0.0 percent increase. On a long-run dynamic basis, taxpayers would see a 0.2 percent increase on average.