NCPA - National Center for Policy Analysis


April 1, 2010

President Barack Obama's new health care legislation aims to raise $20 billion over 10 years to pay for the extensive new entitlements.  How?  By slapping a 3.8 percent "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, along with raising the top two individual income tax rates and other measures. 

But it won't work, says Alan Reynolds, a senior fellow with the Cato Institute:

  • The maximum tax rate fell to 28 percent in 1988-1990 from 50 percent in 1986, yet individual income tax receipts rose to 8.3 percent of gross domestic product (GDP) in 1989 from 7.9 percent in 1986.
  • The top tax rate rose to 31 percent in 1991 and revenue fell to 7.6 percent of GDP in 1992.
  • The top tax rate was increased to 39.6 percent in 1993, along with numerous other major revenue enhancers, yet individual tax revenues were only 7.8 percent of GDP in 1993, 8.1 percent in 1994 and did not get back to the 1989 level until 1995. 

According to Reynolds, a few of the ways that taxpayers will react to the Obama administration's tax plans include: 

  • Professionals and companies who currently file under the individual income tax as partnerships, LLCs or Subchapter S corporations will form C-corporations to shelter income.
  • Investors who jumped into dividend-paying stocks after 2003 when the tax rate fell to 15 percent will dump many of those shares in favor of tax-free municipal bonds if the dividend tax goes up to 23.8 percent as planned.
  • Faced with a 23.8 percent capital gains tax, high-income investors will avoid realizing gains in taxable accounts unless they have offsetting losses. 

In short, when marginal tax rates go up, the amount of reported income goes down.  The belief that higher tax rates on the rich could eventually raise significant sums over the next decade is a dangerous delusion, because it means the already horrific estimates of long-term deficits are seriously understated, says Reynolds. 

Source: Alan Reynolds, "The Rich Can't Pay for ObamaCare," Wall Street Journal, March 30, 2010. 

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