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Tuesday, July 7, 2009

Whack A Mole on Taxes and Health Care

Today, we have two bits of news on Democrats' plans to pay for health care reform. On news story has the Democrats souring on a tax idea. At the same time, another news story has the Democrats warming up to the idea of another tax. First, the Democrats are souring on the idea of taxing health care benefits.

The White House and Democratic congressional leaders struggled to build momentum for health care legislation on Tuesday in the face of concerns about the pace of bipartisan talks in the Senate as well as apprehension among moderate Democrats in the House.

Officials said a deal was pending with the nation's hospitals to give up about $155 billion in government payments over the next decade, money that then could be used to expand health care to millions who lack it. An announcement was possible as early as Wednesday.

At the same time, one lawmaker deeply involved in bipartisan negotiations in the Senate indicated there were second thoughts about a proposed new tax on the costliest employer-paid insurance benefits

Politically, it would have simply been suicidal for the Democrats to have moved forward with this tax. No matter how well they would have isolated the tax it would have affected a whole lot of folks that make less than $250,000 yearly. That's a promise that Obama would not have recovered from.

At the same time, the Democrats are now warming up to a "surcharge tax" on those making $250,000 and more to pay for health care reform.

Two people familiar with closed-door talks by committee Democrats said a House bill probably will include a surtax on incomes exceeding $250,000, as Congress seeks ways to pay for changes to a health-care system that accounts for almost 18 percent of the U.S. economy. By targeting wealthier Americans, a surtax may hold more appeal for House Democrats than a Senate proposal to tax some employer-provided health benefits.

“The surtax is obviously more attractive to Democrats in the House because it’s more progressive, which they find attractive in and of itself,” said Paul Van de Water, a senior fellow at the Washington-based Center on Budget and Policy Priorities, a research group focused on policies affecting low- and moderate-income families.

Supporters on the Ways and Means Committee include Representative Lloyd Doggett, a Texas Democrat who backs including a surtax among revenue-raising measures in a health- care package, Doggett spokeswoman Sarah Dohl said.

There is no number cited so it's impossible to say just how significant this tax will be. Politically, this one is more viable. After all, it merely goes after the wealthy. There aren't enough of them to create a voting bloc that would threaten. Plus, there's plenty of less wealthy that actually like to see a politician stick to the wealthy.

The problem here is economic, though it's significant. President Obama has already planned to let Bush's tax cuts on the wealthy expire in 2011. That will push their income tax rate to nearly 40% in federal taxes. If there's another 3-4%, that will push most of the wealthy's total tax burden to over 50%. (with 7% payroll and state income taxes) Lot's of studies show that there is a psychological effect on taxing people at 50% or more.

Defenders of the president would call this rubbish. For instance, they point out that only 2% of small business owners make $250,000 and more. True, it's also the most successful small business owners. According to the SBA, there were 27 million businesses in the U.S. in 2007 with 500 employees or less. As such, you are looking at about 1 million businesses in which the owner now will pay an extra ten percent more in taxes. Keep in mind that these business owners will now be required also to get health insurance for their employees if they don't already have any.

The effect in lose of commerce can't possibly be quantified. Just think about this. We're at 9.5% unemployment. It's unlikely we'll be much better than this when this is enacted, if it is. So, our economy will still be in a vulnerable state and 1 million of the most successful small businesses in the country will see their tax burden go up about 10%. What do you think that would do to any recovery?

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