Expand the Net Investment Income Tax Base to Include Active Income

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 expands the NIIT tax base to include active business income, increasing marginal tax rates on pass-through business income. This would discourage businesses from investing, shrinking the capital stock, wages, and economic output.

On a conventional basis, this option would decrease the primary deficit by $469.6 billion over the budget window. Long-run GDP would fall by 0.2 percent, and long-run GNP by 0.1 percent. On a dynamic basis, the primary deficit would decrease by $333.8 billion from 2027 through 2036, $135.8 billion less than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be lower than baseline, reaching 173.8 percent by 2056.

On average, in 2036, taxpayers would see decreases in their after-tax incomes of 0.2 percent. The top quintile of taxpayers would experience a 0.4 percent decrease, whereas the bottom quintiles would be mostly unaffected. On a long-run dynamic basis, taxpayers would see a 0.4 percent decrease on average.