U.S. Senate Proposes Medicare Tax Increase
Higher Taxes Damaging to Small Business and Economic Growth
Nov 15, 2009
The Associated Press reports that Senate Majority Leader Harry Reid (Democrat, Nevada) proposes increasing the employee share of Medicare payroll tax from the present rate of 1.45 per cent to as much as 1.95 per cent. This proposal is intended to apply to individuals with annual earned incomes above $200,000 and to married-filing-jointly taxpayers with combined incomes above $250,000. Democrats consider anyone who earns less than these amounts to be middle class taxpayers who would not be affected by the tax increase, in keeping with one of President Obama's campaign promises.
Increased Tax Withholding has Unintended Consequences
Democrats are searching for ways to fund the massive healthcare bill without adding to the already ballooning federal deficit. The strategy of shifting the tax burden from the middle class to the so-called wealthy class may have unintended consequences, however. Many taxpayers who earn in excess of $200,000 annually are owners of small businesses.
A typical small business is commonly structured as a limited liability company (LLC) or subchapter S corporation, which may protect the owner's personal assets from legal action, but which does not separate business income from personal income. As unincorporated businesses, earnings of the business actually flow through to the owner's personal income tax liability. As a result, many middle class small business owners would indeed be affected by this tax increase.
Federal Taxes Kill Economic Growth
According to the U.S. Department of Commerce, small businesses employ just over half of U.S. workers and represent 99.7 per cent of all employer firms. Small business owners have created 64 per cent of all net new jobs over the past 15 years and account for 44 per cent of total U.S. private payroll. During a time when unemployment has reached double digits and appears to be climbing, pinching the creators of jobs may not be a wise course of action.
With consumer spending levels on the decline, businesses can ill afford to raise prices to compensate for higher taxes. As Lori Montgomery and Dion Haynes report in a recent Washington Post article, "Small Businesses Brace for Tax Battle," there is some disagreement as to exactly how many business owners might be affected by the new tax proposals.
The nonpartisan Joint Committee on Taxation concludes that only about 3% of small business owners may be subject to increased taxes under Obama. In contrast, the National Federation of Independent Business reports that approximately 15 per cent of small business owners expect to earn more than $200,000 and face higher taxes under Democrat proposals. Whatever the actual number of affected businesses may be, it begs the question of how many businesses may choose to delay hiring new employees or lay off existing workers to compensate for future tax increases.
As available funds for Medicare and Social Security continue to dwindle, Congress will be ultimately have to find a better way to fund these programs. There is one revenue generating method that has always worked, however counter-intuitive as it may seem. It may not garner votes, but it certainly does generate additional tax revenue.
Throughout the history of the United States, reducing income taxes has always resulted in greater federal tax revenues. As research conducted by The Heritage Foundation shows, lower taxes result in thriving economies that create jobs, swelling payrolls, and increased tax revenues. The tax reductions of the 1920’s, the 1960’s under President Kennedy, and again in the 1980’s under President Ronald Reagan bear this out.
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