Conservative Principles Now

Despite continued controversy surrounding the idea, President Obama and certain Democratic leaders of Congress continue to support health care legislation that includes a new government-run health plan, commonly known as the “public option.”

Liberal advocates who are pushing the so-called public option believe that a new government plan would keep private insurers “honest” and help control health care costs. Conservatives—including analysts at Heritage—have instead argued that a public plan (especially one that’s modeled on Medicare) would arbitrarily cut payments to health care providers and shift costs onto private payers, causing millions of Americans to see an increase in their private health insurance premiums.

Although both sides seem to have firmly staked their ground in the current health care debate, new research published in the peer-reviewed journal Health Affairs has sought to addresses these competing claims about the potential impact of creating a new government-run plan on hospitals’ finances and private health insurance premiums.

After using a range of assumptions, the authors conclude their study, “supports the contention that a government-run plan that is aggressively implemented to include large portions of the privately insured could test the U.S. health care financing system. Rising hospital private-payer payment-to-cost ratios could be followed by rising private insurance premiums. The result could be the antithesis of what advocates say is the advantage of a public plan: to curtail cost growth for the average citizen.”

To help pay for its expensive and painfully complex health care bill, Congress plans on burdening families and small businesses earning over $350,000 with a surtax. Ill-conceived “soak the rich” plans devised by Congress tend to inspire a yawn, a sigh, or applause from the vast majority of citizens who don’t have to actually pay the lopsided amount of taxes that the “rich” pay. Well, as it turns out, more and more of us might actually be “rich” enough to have to chip in to help fund government-run health insurance for the masses.

The surtax proposed by Rep. Charlie Rangel (D-NY) would stand independent of the income taxes Americans are already paying. Generally, a surtax is added onto an individual or business’s taxable income. However, in a maneuver to include more tax-filers into Congress’s double-tax treasure chest (or triple-tax if you invest in anything), Congress has decided to make the surtax applicable to your adjusted gross income, or AGI. Your AGI is what your income looks like before you take out deductions like state and local taxes, medical expenses, and mortgage interest payments. So it’s a higher number than your taxable income.

How much higher? American tax-filers reported over $8 trillion in Adjusted Gross Income in 2006, yet they were only taxed on less than $5.5 trillion of it. The difference between those two numbers might be able to pay for the current health care plan twice! Only 68% of the adjusted gross income of U.S. taxpayers was actually taxable in 2006, yet the current proposed health care bill wants to change the rules and start taxing even more money to help “control” health care costs.

So how does this surtax work? The government would take 1-5.4% from those families and small businesses with an AGI greater than $350,000 ($280,000 if you’re a single filer). Let’s say you’re a small business owner in Baltimore, Maryland with an AGI of $1,100,000, the amount listed in box #37 of your IRS 1040 form. Under this plan you will be taxed 5.4% on that $1,100,000, which comes to a bit more than $59,000. However, when calculating your income tax liability, the government provides you the option of applying a multitude of itemized deductions, found on a Schedule A Form. The total of your deductions can then be filled in on the second page of your 1040. So if you’re paying a 5.5% Maryland State tax, a 3.05% local tax, $5,000 in mortgage interest payments, and another $3,000 in medical expenses, those deductions would help lower the amount you’re liable for by way of income tax, but wouldn’t put a dent in your surtax contribution. In fact, the small business owner would pay approximately $15,000 if the surtax applied to his taxable income, but because it applies to his AGI, he or she has to pay more than $59,000. That’s more than a $44,000 difference! That $44,000 might force the business owner to cut costs somewhere, and that could mean somebody’s out of a job.

And if that’s not enough to cast doubt on the proposed tax hike, the surtax may actually increase in 2013. If the President and Congress are intent on saving or creating jobs, and allowing small businesses to compete on a level playing field, this surtax doesn’t match the rhetoric.