July 23, 2009

July 23, 2009 | Commentary on Health Care

Surtax Proposal Sets off a Fire Bell

President Obama claims health care reform will lower costs. If that's true, reformers shouldn't be calling for painful tax increases.

Yet that's exactly what House Democrats propose in their health overhaul plan, introduced last week. Their call to raise taxes is a sure sign the president's effort to nationalize health care has gone terribly awry.

To help pay for its massive restructuring of the nation's health system, the House legislation would slap an income-tax "surtax" on high-earning families and unincorporated small businesses--those already paying the top tax rate. The top rate already is slated to increase to 39.6 percent, from the current 35 percent, in just 18 months.

The surtax would be layered on top of that: an additional 1 percent on incomes between $350,000 and $500,000, 1.5 percent between $500,000 and $1 million, and 5.4 percent over $1 million.

Once the dust settles, the one-two punch of tax and surtax increases will leave high-earners paying an average top rate of 52 percent for the United States. That's 6 percentage points higher than the lofty top rate in France. Ooh-la-la!

The 52 percent figure represents the fact that government takes a much bigger bite than just federal income tax. In addition to paying the new top federal tax rate of 39.6 percent and the new surtax (which proponents hope will extract an additional $544 billion for good ol' Uncle Sam), high-earners also fork over state--and often local--income taxes and the Medicare tax. It's enough to push this country's top tax bill higher than those of Germany, Italy, Spain and, yes, France--social democracies notorious for their confiscatory taxes, bloated public sectors and perpetually dismal economies.

In fact, the House-proposed surtax is enough to leave almost all the other developed countries in the dust should any be inclined to want to win the title of "most burdensome tax load." Among the member nations of the Organization for Economic Cooperation and Development (OECD)--the world's 30 most economically developed countries--just three would have a higher top income-tax rate than the United States--Denmark, Sweden and Belgium. Taxpayers in all states, even the nine without an income tax, would pay higher income-tax rates than taxpayers in 21 out of the 30 OECD countries.

Raising top marginal tax rates above those of most European countries is a horrible model for the United States to follow. European countries have chronically higher unemployment than the United States and persistently lower economic growth. The United States will suffer the same afflictions if it follows in the footsteps of European countries--and worse if it actually surpasses their punitive levels of taxation.

Such misguided policy can only help drive business and economic activity out of the United States and into other low-tax nations. For example, a business now can function as effectively in the Czech Republic as it can in the United States. But there it pays a 15 percent top income-tax rate--37 percentage points lower than in the United States. Why wouldn't a business go abroad and take its jobs with it?

Raising taxes anytime is harmful to an economy. Doing so during a severe recession is recklessly irresponsible. The fact that members of Congress are "only" talking about increasing the highest tax rates doesn't mitigate the damage.

Indeed, it compounds it because the higher rates are concentrated on the nation's most productive (in an economic sense) citizens. Taxing more of their income will only lower the amount they invest in growing businesses. That will cost the battered economy more jobs and further slow the growth of already stagnant wages.

It's time for Congress and the president to stop expanding government and trying to fund their profligacy by tapping American taxpayers for more and more of their hard-earned money. Adding another colossal health care entitlement on top of unaffordable entitlement programs in Social Security, Medicare and Medicaid just digs the nation's financial hole deeper. It can lead us only to a future of record debt, more European-sized tax increases and economic stagnation.

Instead of saddling recession-weary taxpayers with higher taxes--and future generations with mammoth mounds of public debt--lawmakers should tighten the public purse and work to put existing entitlement programs on a fiscally sustainable path. Otherwise they will doom the U.S. economy to suffer the same fate as the economies of Europe and Scandinavia.

Curtis S. Dubay is senior tax-policy analyst at the Heritage Foundation.

About the Author

Curtis S. Dubay Research Fellow, Tax and Economic Policy
Thomas A. Roe Institute for Economic Policy Studies

First Appeared in the Washington Times