In preparation for today’s bipartisan Health Care Summit, President Obama released his own version of health care reform earlier this week. The President’s proposal includes several high-ticket provisions for expanding coverage. Since he has promised time and again not to raise taxes on the middle-class in order to pay for health care reform, the President’s bill imposes a Medicare tax on the investment income of high-individuals to off-set some of the cost of expanding Medicaid and financing other provisions of his health agenda.
But, as Heritage analysts Karen Campbell and Guinevere Nell explain in a recent paper, these new taxes would have widespread adverse effects for all Americans, not just the wealthy that they target. This is partially due to the very nature of a tax:
“A well-established economic regularity is that if you tax something, you get less of it. For example, policymakers in the Senate recently proposed a tax on “Cadillac” health insurance plans. The justification was that it would not only generate revenue to help pay for subsidized insurance but also reduce demand for high-priced premiums, putting downward pressure on all health insurance premiums.”
The Cadillac health insurance plan tax is intended to reduce the usage of high-cost insurance plans. Similarly, the President’s proposal’s tax on tanning beds discourages their use; the same is the case with cigarette taxes. In several instances, taxes are imposed as punitive measures. So why on earth would the President impose a tax that would discourage investment, delaying recovery from the current economic downturn?
Moreover, Campbell and Nell lay out several ways in which this tax would hit average American households hard. First, the tax would reduce overall household wealth of American families by $274 billion per year. “The value of the investment portfolios of many households–not just the high-income households that directly pay the tax–are reduced by the tax on investment income.”
Second, reducing investment would decrease capital in the U.S. economy, which would reduce potential for economical growth. This affects not only the rate of job creation and wage increase: it would have a dramatic effect on the ability of the federal government to borrow money. According to Campbell and Nell, “A lower U.S. economic potential also harms the ability of the government to borrow, because investors lend to the U.S. based on the expected potential of the U.S. economy. Thus a lower potential economy puts upward pressure on government interest rates in order to attract financing for the nation’s deficit.” Raising government interest rates will add further to the financial burden on taxpayers.
“Because investment is what drives productivity and economic growth, less investment–even if only slightly less–leads to lower productivity, slower economic growth, weaker wages and salaries, and lower household wealth. How much less depends on the underlying supply and demand for investment.”
President Obama’s health care proposal would expand health coverage—but is the detriment to the U.S. economy and the burden on the taxpayer worth the cost?