Surtax to Pay for Government Medicine
Is a Taxpayer Protection Pledge Violation

From Ryan Ellis on Monday, July 13, 2009 11:31 AM

On Friday, House Ways and Means Committee Chairman Charlie Rangel (D-NY) announced a new tax increase to pay for government-controlled health care. Under the plan, taxpayers making as little as $280,000 per year will see a surtax of between 1% and 3% of adjusted gross income.

This “surtax” is merely a thinly-veiled way to raise the top marginal tax rate. A 3% surtax on married couples making $1 million or more would raise the top marginal tax rate in 2011 to 42.6%, up from 35% today.

Raising income taxes at all, and marginal tax rates in particular, is a clear and unambiguous violation of the Taxpayer Protection Pledge. This Pledge has been made by 172 Congressmen and 34 Senators to their constituents and the American people. They promised not to raise income taxes or marginal income tax rates.

The news is worse for small business owners. Small business profits face taxation on their owners’ 1040 forms. Two-thirds of small business profits pay taxes in households making at least $250,000 per year. Thus, this marginal tax rate increase is a tax hike on $2 out of every $3 small business dollars.

This marginal tax hike will affect small employers and their employees. One-third of Americans work in firms with 2 to 100 employees. These small businesses, which must have profits to employ workers, will face these marginal tax rate hikes. The cost will be born out in lower wages and less jobs.

Why raise taxes on job-creating small businesses in the middle of a deep recession with 10% unemployment? It makes no sense to do this economically. When Medicare payroll taxes and state income taxes are added to the mix, a small employer could easily face marginal tax rates approaching 50%, which would be the highest level since the stagflation 1970s.

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Comments

I don't follow this logic: "These small businesses, which must have profits to employ workers, will face these marginal tax rate hikes. The cost will be born out in lower wages and less jobs." Employee salaries are PRE-TAX with any sort of LLC or S-Corp that reports on Schedule C. (Trust me; I write 15 payroll checks every two weeks.) So, if you assume that marginal tax rates on the owner's tax forms will affect his or her willingness to hire people (which is hardly causal), then the more logical result would be that the threat of higher taxes on profits would encourage owners to pay MORE of their profits to new or current employees in order to avoid Schedule C income at the end of the year.
>> Todd Stauffer Monday, July 13, 2009 1:22 PM Report Comment

Let's say that a business right now has profits of $1,000,000, and pays taxes of $250,000. As a result of the surtax, their tax bill will go up to (say) $280,000 (a three percentage point increase). You've just taken $30,000 away from a company's working capital. You don't think that will cause the owner to lay people off, cut wages, etc.? You say you run a business. Suppose that your profits declined by 3 percent. What would that do to your margins?
>> Ryan Ellis Monday, July 13, 2009 2:46 PM Report Comment

To Ryan: A business with $1 million won't pay the 3 percent surtax on the entire $1 million. In fact, if that's all the person has on his 1040 (and he's married), he would pay no 3% surtax. He would pay the 1% and 1.5% surtax. To Todd: Marginal tax rates on profits matter because it lowers the return to investment, thereby decreasing investment, which lowers the marginal product of labor, and thereby lowers wages. But overall in terms of jobs, this is all nonsense talk because jobs will always be there. Wages may fall, but in the long-run, unemployment = 0 (except for structural and frictional). To believe otherwise is to believe markets don't work very well.
>> Nonsense Monday, July 13, 2009 9:12 PM Report Comment

@Nonsense. Minimum wage laws prevent labor markets from working perfectly. A tax on businesses exacerbates this problem by driving the productivity of even more labor inputs below minimum wage.
>> Eustace Tuesday, July 14, 2009 9:57 AM Report Comment

We own a very small business (~$100K/year in sales) that is losing money. My wife and I keep injecting capital into it while we try to drive the business to break-even. We have 1 full-time employee who, by the way, we gave a pay increase to in 2008 to cover the approximate cost of an individual health insurance policy. Is there anyone out there who really believes that when our personal income taxes go up (dramatically) we're going to continue to sink money into this business? And when it goes, what happens to our employee? And what about the contractors, suppliers, and others we do business with who are all struggling to survive in this economy?
>> Hal Monday, July 20, 2009 8:44 AM Report Comment

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Surtax to Pay for Government Medicine Is a Taxpayer Protection Pledge Violation

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Surtax to Pay for Government Medicine
Is a Taxpayer Protection Pledge Violation