Know that House health care plan? Yeah, it's a disaster
It’s not the first Obama tax hike. This tax would be in addition to the $1 trillion in new taxes that Obama called for in his budget released earlier this year. (And then there’s cap and trade, remember.) And if healthcare reform costs more than expected — what are the odds of that, you think? — the surtax would go up.
It pushes income tax rates above a key threshhold. Once you take into account state income taxes, the top tax rate would sneak above 50 percent. Research by former White House economist Lawrence Lindsey has found that rates above 40 percent really start to hit economic growth especially hard.
It’s risky in a weak economy. Democrats love the “consensus view” when it comes to climate change, so how about the economy? The consensus view is for unemployment to hit double digits this year and stay high throughout 2010 and beyond as the economy staggers to its feet. Even Treasury Secretary Tim Geithner said “it seems realistic to expect a gradual recovery, with more than the usual ups and downs and temporary reversals.” In a “long recession” environment, do we really want a policy that, according to research that current White House economic adviser Christina Romer conducted at Stanford University, is “highly contractionary.”
It actually makes America’s healthcare problem worse. Entitlements, including Medicare, will eventually bankrupt the economy unless action is taken. Agreed. But lowering the potential U.S. growth rate will only make those problems worse by generating lower tax revenue and making the overall pie smaller than it would be otherwise. Yet many economists think government interventions in finance, housing, autos, energy and now healthcare will do just that. And adding layers of additional new taxes helps how?
It makes the tax code more lopsided and inefficient. As it is, the top 1 percent of Americans in terms of income pay 40 percent of taxes. Not only would this plan exacerbate this imbalance, it adds further complexity to the tax code. Most tax reformers favor a simpler system with fewer brackets and deductions matched by a lower rate. Indeed, Howard Gleckman of the Tax Policy Center points out the following:
Many of the uber-rich are unlikely to pay much more in taxes than they do now, despite the rate increase. Since we’d be returning to pre-1986 rates, we shouldn’t be surprised when the very wealthy reprise their pre-1986 sheltering behavior. The hoary financial alchemy of turning ordinary income into capital gains, morphing individuals into corporations, and deferring compensation will return. Remember, the targets of these tax hikes are the people who can most easily manipulate their income. The bad old days of bull semen partnerships may not return, but I suspect the financial Merlins are already cooking up new shelters for what promises to be a booming new market.
It hurts U.S. competitiveness. America already has the second highest corporate tax rate in the world. Under the House plan, the top U.S. income tax rate would be higher than the OECD (advanced economies) average of 42 percent. France and Germany, by contrast, are looking to keep rates stable or lower them. Pro-growth China doesn’t even tax investment income.
It ignores the lessons of Clinton. Democrats love to point out how the Clinton tax increases didn’t tank the economy back in the 1990s. Oh, you mean the economy that was expanding for more than two years before he signed his tax increases? The economy is far weaker today and may be anemic for some time given the history of economies that suffered a banking crisis.
It ignores the lessons of 1937. The slowly recovering 1930s economy weakened again in 1937 and 1938. Again, Christina Romer tells all:
In this fragile environment, fiscal policy turned sharply contractionary. The one-time veterans’ bonus ended, and Social Security taxes were collected for the first time in 1937. … GDP rose by only 5% in 1937 and then fell by 3% in 1938, and unemployment rose dramatically, reaching 19% in 1938. The 1937 episode is an important cautionary tale for modern policymakers. At some point, recovery will take on a life of its own, as rising output generates rising investment and inventory demand through accelerator effects, and confidence and optimism replace caution and pessimism. But, we will need to monitor the economy closely to be sure that the private sector is back in the saddle before government takes away its crucial lifeline.
Except in this the case, Uncle Sam is not taking away a lifeline but tightening the noose.
It pays for a wrong-headed healthcare reform plan. Health exchanges, a public option, subsidies, taxes … well, we could go on and on. Or we could try to create a simpler consumer-driven market. Harvard Business economist Regina Herzlinger recommends reforming the tax system by making the money spent by employers on health insurance available as cash, tax-free, to employees. “Insurers would then compete for customers with policies that offer better value for the money,” she wrote in an analysis for consultancy McKinsey. Not even on the Obamacrat radar screen, though.
This plan will literally wreck the economy as Veronique de Rugy outlines in this post at NRO's The Corner:
In order to pay for the $1 trillion health-care plan, they won't be cutting spending (it's probably too 1990s for today's lawmakers) but they will be imposing new taxes — surtaxes in fact — and fees and penalties. Finally, America will become like its European counterparts, a place where it's painful to work hard and be rewarded for it.
Read this New York Times article about how the plan will be paid for and cry. A sample:
Starting in 2011, a family making $500,000 would have to pay $1,500 in additional income tax to help subsidize coverage for the uninsured. A family making $1 million would have to pay $9,000.
Employers who do not provide health insurance to workers would generally have to pay a fee or penalty to the government. The fee would be equal to 8 percent of wages for an employer with an annual payroll of more than $400,000.
Mais bien sur! In a high-unemployment environment, let's raise the cost of employing people.
The surtax would apply to any adjusted gross income exceeding $280,000 a year for an individual and $350,000 for a couple filing a joint return. The tax rates would range from 1 percent to 5.4 percent.
Who wants to bet that the number of people filing a joint return will collapse? Moi! (I have to practice my French, since that's where we are heading.)
I know that a lot of people would click their tongues and say "The rich deserve to pay more." Above, Mr. Pethoukoukis reminds people of what Howard Gleckman of the Tax Policy Center stated about how the rich would dodge these new taxes:
Many of the uber-rich are unlikely to pay much more in taxes than they do now, despite the rate increase. Since we’d be returning to pre-1986 rates, we shouldn’t be surprised when the very wealthy reprise their pre-1986 sheltering behavior. The hoary financial alchemy of turning ordinary income into capital gains, morphing individuals into corporations, and deferring compensation will return. Remember, the targets of these tax hikes are the people who can most easily manipulate their income.
This plan is a prescription (pun intended) for economic disaster. In a severely weakened economy, such as our own is right now, adding a heftier tax burden to the people is not the solution. Remember, when the rich shelter their money, what happens to those new taxes? Do they go away? Hell no. They get passed onto the next level of citizens which means the upper middle class and middle class taxpayers will pick up the burden; a burden they already can't sustain.
Real health care reform can be achieved, but forcing this plan on the American public will mean that our private insurance we have will fold, and we'll be forced to have the nationalized health care that we defeated by in the early 1990s. HillaryCare was a catastrophe then, and it's still one today.
ADDENDUM: I forgot to include something else in this post. James R. Edwards, Jr. pens a piece for National Review which makes a valid point, especially at this particular time: "It’s hard to envision how health reform can avoid tripping the immigration booby trap." From his piece:
Senate Majority Leader Harry Reid (D., Nev.) has insisted the Senate will deal with immigration and health reform separately. And Senate Finance Committee Chairman Max Baucus (D., Mont.) told the Dallas Morning News in May, “We’re not going to cover undocumented aliens, undocumented workers. That’s too politically explosive.”
But it’s hard to envision how health reform can avoid tripping the immigration booby trap. Approximately 15–22 percent of the 46 million residents of the United States without health coverage are illegal aliens. That’s about 9 or 10 million people. More generally, a third of the foreign-born are uninsured, Census data analyzed by the Center for Immigration Studies show. That means something like 12.6 million people, or more than a fourth of the total uninsured, are immigrants, both legal and illegal. Since 1989, immigration is responsible for 71 percent of the rise in those without health insurance. The fact is, the problem of the uninsured would be a more manageable one if the U.S. were not admitting millions of uninsured immigrants.
As they say, folks, read it all. We have to stop this plan here and now.