Tax Law

Proposed Surtax in House Bill Health Plan Raising Eyebrows

If the 4.6% income-tax rate increase coming in 2011 isn't enough to take the wind out of the sails of high-income taxpayers, how does a hefty surtax to pay for health care reform sound?  The $1 trillion House bill to extend health care to the uninsured would tack on an extra surtax ranging from one percent to 5.4 percent for joint filers in 2010, depending on qualifying taxpayer income, jumping up to a range of two percent to 5.4 percent in 2013.  This means that married couples making $1 million or more could expect to carry a marginal tax rate burden of 45 percent in 2013, ten (10)percent higher than the current 35 percent rate.

Examining the Impact

Some of those not affected by this idea might say, "So what?"  But what about the potential impact this change could have on small business enterprises?  If a small business owner is paying her business taxes as part of her personal income taxes, the impact could affect the financial strength of the business, not just the owner.  Even now, entrepreneurial pursuits carry a host of federal and state tax liabilities, in addition to legal liability exposures, that initmidate all but the most cunning of business people, those with the best and brightest ideas.  The entrepreneur's control of these externally imposed exposures is limited, if not altogether absent.  To navigate these treacherous waters, shrewd and calculated deliberations in crafting business plans must accompany ambition and financial resources, which are hard to come by these days. 

Now significant tax increases are on the radar, at least in the House version of the health care reform bill.  We're in a distressed economy right now: In this environment, how many business start-ups can we forecast?  For that matter, how many existing small businesses might be persuaded by the higher tax bite to fold their tents and close shop?  Is this the result we're shooting for?  Proponents of the House plan might suggest that the 2013 surtax increase envisioned  for the two lower surtax rates would materialize only if budget savings don't meet expectations.  But do we really expect to meet expectations? Place your bets!

Hope for Sanity in the Senate Bill

Let's hope the Senate version of health care reform in late July yields a more rational proposal. Tapping pharmaceutical companies and insurance companies is in the Senate agenda, supplementing tax increases on high-income individuals.  At least "spreading the wealth," so to speak, would seem to be more in tune with today's conventional wisdom in Washington.

Truth in Semantics

Separate and apart from bills being introduced by the House and Senate, let's also examine consistent references in the health care reform movement to expanding health "insurance" coverage to the uninsured.  The drive to provide health care to millions who lack access has a great deal of merit.  But strictly speaking, creating a public sector alternative to private sector insurance products does not contemplate an additional "insurance" option. 

Proponents of health care reform are reluctant politically to admit that a new entitlement is being conceived.  Will the public sector alternative rely on actuarial data and claims experience in line with historically consistent insurance industry practice?  I don't think so.  So, it isn't fair to call the public sector alternative, "insurance."  In the debate, let's be fair and call it a worthwhile "entitlement."

While we're at it, let's also recognize that the insurance/entitlement issue is one factor behind insurance industry objections to public sector involvement. Government power to tax is a tool the insurance industry lacks.  Moreover, insurance industry premium rate-making is strictly regulated; presumably the same restrictions would not be a part of government rate-making. The insurance industry will clearly be subject to significant disadvantages competing against the federal government.  We all need to understand this, and why.

  • You have forgotten to include the 2.5% Medicare tax, which would push the total federal income tax rate to over 47% for those making more than $1 million. If you''re residing in California, your marginal income tax rate would approach 60%. Because deductions have been whittled away since 1982, this would be about as high as the effective income tax rate has ever been.

    What will happen if this is enacted? Revenue will fall way below projections, as taxpayers will defer income and take other steps to avoid being in the highest bracket. As is noted, small business jobs will tank, making the economy even worse.

    The Dems are rapidly turning the U.S. into France.