A New Surtax on the “Wealthy” Will Harm Small Business

I may have been wrong. I was all worried about President Obama’s cap-and-trade energy policies being the death of small businesses. After all, his scheme would raise energy prices across the board, spur inflation as the energy costs for all stages of production and distribution were all factored into the prices of both raw materials and finished products while vendors had their own energy costs to add as well. Never mind the increased energy costs that consumers would face. All in all, it’s a 5-star recipe for economic disaster and increased unemployment as jobs and capital flee to more tax-friendly places; but it has nothing on Obama’s healthcare reform measures.

 

Sure, we have a problem when it comes to the uninsured. Paying for their medical care drives up the costs for everyone else. OK, I get that. What I don’t get is the idea that instead of simply giving these 46 million people health insurance, you have to socialize the entire American medical establishment and tax the most productive members of society—people who create jobs and are already carrying a disproportionate tax load—to do it. How much would it cost to expand Medicare to cover them? My guess is that it would be a damn sight less than the $1 trillion Obama’s plan calls for, which would be a good thing given the horrific recession we are all riding out. But then, I am not thinking very progressively, am I? The answer to this question has nothing to do with healthcare, any more than cap-and-trade has anything to do with reducing greenhouse gas emissions, which everyone admits it won’t do. No, the answer to why they simply won’t choose the fastest and most expedient answer to the problem of the uninsured is all about politics.

 

And so is the Democratic solution for funding their reforms: Soak the rich.

 

The Problem with “Soak the Rich”

The funding solution that the House Democrats came up with is delightfully populist in nature and reeks of the class struggle that these people live and breathe: According to Reuters, they have settled on a 5.4% surtax on the most productive members of our society. That is, people making over a million dollars and that is over and above increases in income, capital gains and other taxes as well as cuts in Medicare reimbursements. That means that there will be a large number of people paying over 50% of their income to federal, state and local governments. Bloomberg described the plan is as follows:

 

House Democrats plan to fund the broadest U.S. health-care expansion in four decades by increasing taxes on the wealthiest Americans, imposing a surtax of 5.4 percent on couples with more than $1 million in income.

 

The legislation unveiled yesterday would place additional taxes on households with more than $350,000 a year in income and calls for further increases if the measure doesn’t hit a target for cost savings. The provisions are intended to raise $544 billion over 10 years.

 

House leaders said the plan, which includes mandates to purchase coverage and a public health-insurance option, would cover 97 percent of Americans by 2019. President Barack Obama praised their work, saying it will “begin the process of fixing what’s broken” in the system.

 

Now, many of these people are small business owners, sole proprietors, for example, whose business income is passed through to their federal tax returns. If they have a good year, they will be forced to give much of their profits to the government, so what is the use of having a good year? On a more practical level, how will our small business owner cover these additional taxes? He can only raise prices so much before he drives away his increasingly cost-conscious customers, then what? He will cut jobs, cut down on products and services, and make changes to the benefits for the people is able to keep on the payroll. He will do all these things and it still may not be enough to keep the business open. After all, our entrepreneur is not in business as a charity, he is in business to provide for himself and for his family. If he cannot do this, there is no point in staying in business, is there?

 

Reaction to the plan has been sharp. According to Bloomberg’s Ryan J. Donmoyer and Kristin Jensen, the plan drew fire from the US Chamber of Commerce, the nation’s biggest business lobby. “The intention of this plan is to tax high-income households, but the real victims would be America’s small business owners,” the Washington-based group’s president, Thomas Donohue, said in a statement. “Since when does our great free-market country punish success?”

 

Eric Cantor, the No. 2 House Republican, added to that by noting that the plan would be paid for by the “small business men and women we are counting on to start hiring workers again.”

 

The Bottom Line

So, small businesses—the engine of our economy—are to suffer because their owners are taxed beyond anything that is fair or reasonable to fund a so-called reform that is manifestly unnecessary and will likely go unread by anyone voting on it. According to Obama advisor David Axelrod who, along Chief of Staff Rahm Emmanuel, is pushing for a fast vote, “If we’re going to get this thing done, obviously time is a-wasting.”

 

That is the thinking that led to no one reading the stimulus bill or the cap-and-trade energy bill, both of which continue to yield gems that force lawmakers to say, “Gee, I didn’t know that was in there.” That is hardly a comforting thought, especially with this healthcare bill.

 

So, what’s the rush? Again, the answer is political: They know that with the 2010 elections around the corner, and the likely backlash against them from the voters, they have only so much time to push this through. If they gave this measure—any of the measures they have passed so far—the kind of debate and scrutiny they should have, Obama, Pelosi, Reid and the others know that they would have a tough sell on their hands at best, and that after the election, it would be impossible. So yes, time is running out.

 

Still, it is, as Emmanuel said, about results, and those don’t augur well, either. As with the recently passed energy bill, Obama Healthcare reform is going to be a business killer, but instead of attacking the business directly by running up costs, it attacks the owners of the businesses. Many will switch over to corporate structures and carry on that way, but many won’t. Others will pull up stakes for friendlier tax environments, if they can. Still other will just vanish. It’s a recipe for political control over healthcare, but how is it a recipe for prosperity?