A comprehensive program of healthcare for the elderly, the American Medicare program taxed workers 1.45% of their entire earnings in 2011, an amount their employers were required to match. In addition, employers pay 1.45% of their total payroll from their own funds, and self-employed workers pay 2.90%. The taxes are paid via the mechanisms set up by the Federal Insurance Contributions Act (FICA), and both employers and taxpayers reconcile the amounts paid when they file their annual income tax returns.
Medicare began in 1966 with a tax rate of 0.35% applied only to the first $6,600 US Dollars (USD) of Americans’ earnings annually, with a matching amount to be paid by their employers. Thus, a worker earning $6,600 USD or more in 1966 had $23.10 USD in Medicare taxes withheld from his pay over the course of the year, and that amount was matched by his employer. The self-employed paid the same rate as other workers — 0.35% —, with no matching contributions made for those payments; this apparent inequity in the plan was a frequent target of critics.
Once the program was established, Medicare tax rates, and the associated earnings cap, grew rapidly. By 1973, the rate on employees had almost tripled to 1%, and the earnings cap had risen to $10,800 USD. The maximum Medicare tax an American worker paid in 1973 had risen to $108 USD, which was matched by his employer; the self-employed also paid a maximum of $108 USD, with no employer match.
Medicare tax rates for employees and the self-employed were lowered to 0.90% in 1974, but the earnings cap continued to increase, so the total tax paid annually by workers earning more than the cap also continued to increase. The rate reverted to 1% in 1978, and reached 1.35% in two steps over the next three years. The earnings cap also rose annually, and by 1981 had reached $29,700 USD. Over the next five years, Medicare tax rates increased to 1.45% on employees and the self-employed, and the earnings cap rose to $42,000 USD. In 1984, the inequity of the rate paid by the self-employed was addressed when Congress doubled the rate applicable to that group; ever since, the self-employed have paid both the employee’s share and the employer’s share of the Medicare tax.
The 1.45% rate has remained stable since 1986, but the earnings cap, the same used for calculation of Social Security taxes, steadily increased. Prior to 1991, the same earnings cap applied to both Medicare and Social Security; in 1991, though, the Social Security earnings cap increased to $53,400 USD, while the Medicare earnings cap skyrocketed to $125,000 USD. The cap increased to $135,000 USD over the next two years, after which it was lifted altogether.
Although Medicare tax rates have been set by Congress in a political climate, their deliberations have been informed by the same economic realities faced by insurance companies when they’re determining health insurance premium rates. The Medicare taxes withheld from workers’ pay, together with Part B premiums collected from retirees, fund the Medicare program, which is faced not only by a growing population of participants, but also by escalating healthcare costs. This is the main reason for the dramatic increase in the Medicare tax earnings cap in the early 1990s, followed by the elimination of the cap completely.