The Homa Files

Punch line: ObamaCare intends to squeeze an extra $1.2 trillion over 10 years from a minority of citizens — the taxpayers.

The key assumption — that tax payers won’t change behavior to contain tax impacts — has been proven to be fallacious in the past, and isn’t likely in the future …

Excerpted from WSJ: The Rich Can’t Pay for ObamaCare, March 30, 2010

President Barack Obama’s new health-care legislation aims to raise $210 billion over 10 years to pay for the extensive new entitlements … by slapping a 3.8% “Medicare tax” on interest and rental income, dividends and capital gains of couples earning more than $250,000, or singles with more than $200,000.

The president also hopes to raise $364 billion over 10 years from the same taxpayers by raising the top two tax rates to 36%-39.6% from 33%-35%, plus another $105 billion by raising the tax on dividends and capital gains to 20% from 15%, and another $500 billion by capping and phasing out exemptions and deductions.

Add it up and the government is counting on squeezing an extra $1.2 trillion over 10 years from a tiny sliver of taxpayers who already pay more than half of all individual taxes.

It won’t work. It never works.

Punitive tax rates on high-income individuals do not increase revenue. Successful people are not docile sheep just waiting to be shorn.

From past experience, these are just a few of the ways that taxpayers will react to the Obama administration’s tax plans:

• Professionals and companies who currently file under the individual income tax as partnerships, LLCs or Subchapter S corporations would form C-corporations to shelter income, because the corporate tax rate would then be lower with fewer arbitrary limits on deductions for costs of earning income.
• Investors who jumped into dividend-paying stocks after 2003 when the tax rate fell to 15% would dump dividend paying stocks in favor of tax-free municipal bonds if the dividend tax went up to 23.8% as planned.
• Faced with a 23.8% capital gains tax, high-income investors would defer realizing gains in taxable accounts until there are offsetting losses.
• Faced with a rapid phase-out of deductions and exemptions for reported income above $250,000, any two-earner family in a high-tax state could keep their income below that pain threshold by increasing 401(k) contributions, switching investments into tax-free bond funds, and avoiding the realization of capital gains.
• Faced with numerous tax penalties on added income in general, many two-earner can become one-earner couples, early retirement would become far more popular, executives would substitute perks for taxable paychecks, physicians would play more golf, etc.

In short, the evidence is clear that when marginal tax rates go up, the amount of reported incomes goes down.

Economists call that “the elasticity of taxable income” (ETI), and measure it by examining income tax returns before and after marginal tax rates claimed a bigger slice of income reported to the IRS.

The federal government has embarked on an unprecedented spending spree, granting new entitlements in the guise of refundable tax credits while drawing false comfort from phantom revenue projections that will never materialize.

Full article:
http://online.wsj.com/article/SB10001424052702304370304575151682845921038.html#printMode

This entry was posted on April 5, 2010 at 7:47 am and is filed under Health Care / Medical Insurance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.