Health Care Reform and Tax Hikes

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I have not yet written about the health care bill or reform in my blog. The main reason for that is because the issue is such a hot political potato and also because what is actually in the bill keeps changing. It would appear that this week is a huge milestone on whether we get this particular bill signed into law. 

I do want to go on record as stating that I support reform. As a business owner, I have seen all too often double digit rate increases in our health insurance. Our country just has to deal with this problem of out of control health care costs. While my friends tell me I have an opinion on everything, this is one subject for which I am not sure I have the answers.
The most recent version of the bill racing through committee appears to be adding numerous new taxes. The one that really caught my eye was the addition of the 2.9% Medicare payroll tax to also include “unearned income.” Everyone that works and receives “active income” pays FICA and Medicare taxes. Those that are employees only pay half (FICA 6.2% and 1.45% Medicare) of the 15.3% and the employer pays the other half. Self-employed people pay both halves of this tax.
The FICA portion has a limit that is currently only applied to the first $106,800 of earned income. The Medicare portion has no limit to that which is taxed at 2.9%. Under the current bill, that 2.9% would first change to 3.8% and then would also include income from interest, dividends, capital gains, annuities, royalties, and rents for individuals with adjusted gross income above $200,000 and joint filers over $250,000.
Now, you tell me why someone that is currently earning $150,000 as an employee would want to risk leaving that job to start their own business, which could potentially put them over the income limit and subject themselves to the additional taxes imposed by this bill. Isn’t entrepreneurship and the hope of building a better future one of the wonderful attributes (it is called the American Dream) that makes this country great? I don’t understand why the House leadership would risk losing something so basic and valuable to the American culture.
An interesting point, earning a single dollar over the $200,000 in adjusted gross income will impose the Medicare tax on EVERY dollar of investment/passive income. This would create a HUGE marginal tax rate spike. Our tax code has always been graduated, meaning it gradually goes up as you earn more. However, earning just $1 dollar of earned income over $200,000 could cause thousands of dollars of additional taxes on a taxpayer’s entire investment income.
As I have written many times before, risk is where profit comes from. Most times that risk requires capital and investment in order to get a return. If we start taking away the incentive to invest (and creation of jobs that often follows), we will struggle to get entrepreneurs to risk anything. That could certainly prolong our recession.


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