October 31, 2004
Both Bush And Kerry Miss The Mark On Health Care (Post #8 of 9)
Posted by Nick Infusino

<font color="purple"><u>Kerry's Tax Incentive System</u>

John Kerry proposes to encourage numerous employers to provide health insurance by creating tax incentives, allowing all Americans access to Congress' health care plan, and by having the federal government act in an umbrella capacity.  Kerry proposes to provide tax credits to small businesses that provide health insurance to low and moderate income employees (credit would cover up to 50% of employers cost).  Access to the Congress' health care plan would utilize "power in numbers" to increase bargaining power of small business employers to reduce premium cost.  Finally, having the federal government act in an umbrella capacity (by subsidizing high cost health care cases), Kerry hopes that providing this form of catastrophic insurance would reduce premiums by an average of $1,000 per American family.</font color="purple">

<font color="purple">The largest problem with these proposals is obvious--where will the funding come from?  Many experts have provided a wide range of cost estimates of these proposals, ranging from the mid to high hundreds of billions up to over a trillion dollars over a ten year period.  Kerry has never clearly articulated where the revenue needed for these plans will be derived from (other than rolling back parts of Bush's tax cuts).  This issue has been extensively covered in the media so I am only going discuss one potential tax implication to small businesses due to these proposals.   

In the second debate, Kerry famously looked into the camera and promised the American middle class that he would not raise their taxes.  For the purposes of this post, I am going to hold Kerry to his word and assume that he will only raise taxes on "millionaires."  The first problem with Kerry's proposal is in his definition of "millionaire."  Kerry is defining "millionaire" as anyone who's combined household income exceeds $200,000 a year.  This definition is going to include income derived from salary, S Corp income, partnership income, LLC income, investment income, etc.  The problem with Kerry's tax increases is that it will have a disproportionate affect on small business.

$200,000 a year may seem like a lot of money for the typical American family, but for a small business proprietor, it only equates to a moderately successful business year.  Small business income is highly unpredictable.  In bad economic years, a small business proprietor will yield far less than that proprietor would in good economic years.  This unpredictability in income forces the small business owner to be conservative with income in boom years because they can foresee lean years occurring in the not so distant future.  Therefore, a small business proprietor will make an estimate of average earnings over a long period of time (maybe for a five-year period) and base spending habits on that estimate.

Raising taxes on people with $200,000 or more a year in income will actually lower the average take home salary of a small business proprietor since it would tax the boom years too heavily.  For example: a small business proprietor may average $150,000 a year in salary for a 5-year period but the income distribution may be $100,000 a year for four years and $350,000 in one year.  Under the current tax system, the percentages in the different tax brackets are lined up so the tax savings of being in the lower tax bracket during lean years offsets the higher tax in the boom year.  Raising the tax bracket of $200,000 a year earners while maintaining the lower tax rates in the lower brackets distorts the offsets under the current system since the small business proprietor gets taxed heavier in boom years and the tax savings in lean years will not adequately offset this heavier tax burden.  Thus, the small business proprietor is being taxed more than a salaried employee earning $150,000 a year during the same period.  This will only stifle small business growth since the increased tax burden during boom years takes away money that the small business proprietor could have used to expand the business. 

The other problem with Kerry's proposal is that the statistics used to justify it are skewed.  Kerry claims that only 2% of Americans derive $200,000 a year or more in income.  Kerry's statistics fail to take into account incomes in a booming economy.  If you look at small business income between 1997-1999, one would see that a moderate percentage of small businesses earned more than $200,000 a year.  Thus, Kerry's tax increases will directly affect a large number of small businesses despite his claims to the contrary.  This would be bad for America since a slow down in small business growth would hurt the entire economy because much job growth in America is attributed to the growth in small business.

The final post will be up tomorrow.</font color="purple">

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