Don’t fund healthcare by taxing capital

March 25, 2010

Washington will have difficulty producing a stranger bit of public policy than raising investment taxes to pay for healthcare reform. Remember, the consensus critique of the U.S economy is that it’s been plagued by too much consumption and debt. O.K., fine. So the answer is penalizing savings and investment? Really? Pure Bizarro economics for that and a number of other reasons:

1) It will hit the middle-class eventually. Wealthier Americans — families making over $250,000, individuals $200,000 — are the supposed targets here. Add in the new 3.8 percent Medicare tax to the year-end expiration of the 2003 Bush tax cuts, and they will see their capital gains and dividend rates will soar from 15 percent currently to 23.8 percent and 43.4 percent in 2013, respectively. But the income levels aren’t indexed for inflation. So the taxes will reach further down the income ladder each year. Assuming steady inflation, the tax in 2013 will actually affect households making over $226,000 and individuals $183,000. Another crack in the Obama tax pledge.

2) It is an expensive way to raise government revenue. Most studies show that raising the cost of capital lowers business investment and productivity. That translated into a lower standard of living. Hardly surprising, really. Taxes matter. Tax something and you tend get less of it. That’s a principle embedded, for instance, in calls to put a price on carbon, something the White House supports. Or in this, less economic growth.
3) It creates an accidental industrial policy. People should make economic decisions based on economic merit and efficiency, not because the tax code puts its thumb on the scale. For instance: Companies are financed either by issuing debt or selling shares. By raising taxes on equity, you further bias the tax code toward debt since interest can already be deducted from taxes. This imbalance was something an Obama tax commission, led by Paul Volcker, thought needed remedy. Instead, it will be worsened. The differing cap gains and dividend rates also tilt the tax code in favor of profit-poor companies (but with bright prospects and high stock price appreciation) over those throwing off cash.

4) It moves the tax code in the wrong direction. Economists favor paying for healthcare, as well as cutting the U.S. budget gap, with consumption taxes. (That would include eliminating the mortgage interest deduction to reduce housing consumption.) That could be a straight value-add tax. Or, better, a Hall Rabushka flat consumption tax. Actually, taking investment taxes to zero is a quick and dirty way to create a consumption tax since all you can do with income is save it or spend it. Of course, cutting spending should be the first order of business. Create a better tax system, reduce expenditure and then see where you are at as far as the deficit goes.

5) It puts politics over sound policy. For an administration that tries to follow economic consensus, this is an odd deviation. Politics explains it. Consumption taxes are broad taxes. The only taxes Washington finds palatable are those on upper incomes, such as found on Wall Street. But taxing the capital they provide to pay for healthcare will only sicken the American economy.

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[...] Pethokoukis has the reasons, Don’t fund healthcare by taxing capital Washington will have difficulty producing a stranger bit of public policy than raising investment [...]

[...] This post was mentioned on Twitter by stephenkruiser, seanhackbarth, Politiconomic, Russ Maynard, Fred and others. Fred said: RT @JimPethokoukis: My Reuters Breakingviews column: 5 reasons why taxing investors to pay for healthcare is nuts http://tinyurl.com/y87z9b5 [...]

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[...] onerous taxes, including items large and small. One of the biggies is a new 3.8% hit on capital gains, dividends, investment income, and rental income. One relatively small but especially annoying item that [...]

[...] onerous taxes, including items large and small. One of the biggies is a new 3.8% hit on capital gains, dividends, investment income, and rental income. One relatively small but especially annoying item that [...]

There’s currently a Medicare prescription drug loophole between roughly $2700 and $6200 worth of medicine. The reform bill each supplies a $250 rebate to Medicare beneficiaries that fall into this loophole and offers for the gap’s closing.healthcare fund

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