Heritage: Taxes Proposed to Pay for Health Care Reform

[spursncowboys]

Taxes Proposed to Pay for Health Care Reform
by Curtis S. Dubay
WebMemo #2706

The U.S. Senate recently released its long-awaited proposal for a government-run hostile takeover of the entire U.S. health care system. Predictably, it includes a barrage of higher taxes to pay for the bill's immense price tag.

An important addition to the list of tax hikes included in the Senate bill was an increase in the Medicare portion of the payroll tax. The current Medicare tax is 2.9 percent, paid half each by workers and employers. The proposal in the Senate bill raises this to 3.4 percent for workers making more than $200,000 a year ($250,000 for joint filers).

Under a long-standing principle, taxpayers pay the Medicare tax during their working years and receive coverage for hospitalization during their retirement. Using the additional payroll tax revenue from raising the rate to pay for a new, separate en lement program would break the long-established tie between the tax and the benefits taxpayers receive for paying it.

Using new revenue from the Medicare tax to fund health care reform would be as illogical as raising the federal gas tax, which funds highway construction and maintenance, to pay for a new welfare en lement.

Higher Taxes Than France

Higher Medicare taxes would push the top average marginal tax rate even higher than already scheduled. Currently, the top federal tax rate is 35 percent, but President Obama has proposed to allow it to increase to 39.6 percent.

In addition, the House of Representatives' version of health care reform includes a 5.4 percent surtax on incomes over $500,000 a year. All these increases, combined with state and local income taxes, would raise the average top marginal rate in the U.S. to over 52 percent. This would be higher than traditionally high-tax countries such as Italy, Spain, and even France.

A Growing List

Below is a list of the tax increases Congress and the Administration have proposed to finance health care reform. This list includes taxes in the bill passed by the House of Representatives, the bill the Senate is currently debating, and other taxes mentioned as a possible way to pay for health care reform.

An income surtax on taxpayers earning more than $500,000 a year,[1]

An excise tax on high-cost "Cadillac" health insurance plans that cost more than $8,500 a year for individuals or $21,000 for families,[2]

An excise tax on medical devices such as wheelchairs, breast pumps, and syringes used by diabetics for insulin injections,[3]

A cap on the exclusion of employer-provided health insurance without offsetting tax cuts,[4]


A limit on itemized deductions for taxpayers with a top income tax rate greater than 28 percent,[5]

A windfall profits tax on health insurance companies,[6]

A value-added tax, which would tax the value added to a product at each stage of production,[7]

An increase in the Medicare portion of the payroll tax to 3.4 percent for incomes great than $200,000 a year ($250,000 for married filers),[8]

An excise tax on sugar-sweetened beverages including non-diet soda and sports drinks,[9]

Higher taxes on alcoholic beverages including beer, wine, and spirits,[10]

A tax on individuals without acceptable health care coverage of up to 2.5 percent of their adjusted gross income,[11]

A limit on contributions to health savings accounts,[12]

An 8 percent tax on all wages paid by employers that do not provide their employees health insurance that satisfies the requirements defined by the Secretary of Health and Human Services,[13]

A limit on contributions to flexible spending arrangements,[14]

Elimination of the deduction for expenses associated with Medicare Part D subsidies,[15]

An increase in taxes on international businesses,[16]

Elimination of the tax credits paper companies take for biofuels they create in their production process--the so-called "Black Liquor credit,"[17]

Fees on insured and self-insured health plans,[18]

A limit or repeal of the itemized deduction for medical expenses,[19]

A limit on the Qualified Medical Expense definition,[20]

An increase in the payroll taxes on students,[21]

An extension of the Medicare payroll tax to all state and local government employees,[22]

An increase in taxes on hospitals,[23]

An increase in the estate tax,[24]

Increased efforts to close the mythical "tax gap,"[25]

A 5 percent tax on cosmetic surgery and similar procedures such as Botox treatments, tummy tucks, and face lifts,[26]

A tax on drug companies,[27]

An increase in the corporate tax on providers of health insurance,[28] and

A $500,000 deduction limitation for the compensation paid by health insurance companies to their officers, employees, and directors.[29]
More to Come

The full list of taxes proposed to pay for health care reform is provided because taxes currently left out of the Senate or House bills could reappear at any point. For instance, the tax on cosmetic surgery listed above (sometimes called the "Botox tax") was written off long ago as a laughable way to pay for health care reform. Nevertheless, it somehow found its way into the current version of the Senate bill.

As the legislative process continues and Congress's desperation to pass a bill increases, it could propose even more tax hikes to pay for its massive expansion of government size and power. The Heritage Foundation will update this list with each new proposal.

No Time for Tax Hikes

Raising taxes at any time is economically harmful, but doing so during a severe recession is reckless. The higher taxes in the health care plans would depress economic activity and delay recovery. When the recovery does finally come, it would be weaker than it would have been without all the tax increases. In the long run, economic growth would remain lower because of these damaging tax increases.

Instead of rushing through a badly conceived health care bill and raising taxes to pay for it, Congress should focus first on economic recovery by increasing the incentives to work, save, invest, and take on new economic risk. Congress can do so by dropping all talk of tax increases and extending permanently the 2001 and 2003 tax cuts.[30] That is the only way to pull the economy out of the "Great Recession" and get unemployed Americans back to work.

Curtis S. Dubay is a Senior Analyst in Tax Policy in the Thomas A. Roe Ins ute for Economic Policy Studies at The Heritage Foundation.

[exstatic]

So, they should be like the GOP and spend the with NO ATTEMPT TO EVER PAY FOR IT?

Oh, and frankly, I don't care if the uber rich have to pay France taxes. You also realize that your whole income isn't taxed at the highest bracket rate, right? Only the part above the income threshold. The rest is taxed at the lower bracket rates, so it's not really like France at all. Someone in the 35% or prospective 39% bracket might have an effective tax % in the 20s, depending on how far over the top bracket most of their income is.

[Nbadan]

Taxes should be raised back to the Clinton level before the Bush tax cuts..it would help balance the budget and prove to our debt creditors that we are serious about getting serious about debt....there is no proof that this increase would stunt the current economic growth..if anything it may strengthen it...

[mogrovejo]

Can't be.

Obamacare is free. Free health-care for millions of Americans! Free!

[Marcus Bryant]

And the warfare-welfare state rolls on.

[Wild Cobra]

Taxes should be raised back to the Clinton level before the Bush tax cuts..it would help balance the budget and prove to our debt creditors that we are serious about getting serious about debt....there is no proof that this increase would stunt the current economic growth..if anything it may strengthen it...

Bull .

There will be a temporary influx until everyone adjusts. Then, with people having less money to buy goods and services, the tax base will go down, and the government revenues will decline.

[coyotes_geek]

Taxes should be raised back to the Clinton level before the Bush tax cuts..it would help balance the budget and prove to our debt creditors that we are serious about getting serious about debt....there is no proof that this increase would stunt the current economic growth..if anything it may strengthen it...

If we were serious about debt, we wouldn't be looking for ways to spend trillions of dollars on a new en lement program.

[mogrovejo]

Taxes should be raised back to the Clinton level before the Bush tax cuts..it would help balance the budget and prove to our debt creditors that we are serious about getting serious about debt....there is no proof that this increase would stunt the current economic growth..if anything it may strengthen it...

How would exactly a tax increase make the economy stronger?

[boutons_deux]

"tax increase make the economy stronger"

look it up, periods of high tax have been periods of high investment and real growth, not bankster assholes shifting electronics funds back and forth among themselves.

[Marcus Bryant]

Yes, the state takes in more during periods of high real growth.

[mogrovejo]

"tax increase make the economy stronger"

look it up, periods of high tax have been periods of high investment and real growth, not bankster assholes shifting electronics funds back and forth among themselves.

I'm not sure what do you mean. Tax rates or total tax revenues? And do you mean there's a correlation or that it was the high tax rates that lead to higher investment and growth? Can you provide a link or examples?