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ISSUE CLASH: Should wealthy Americans be taxed to pay for health care reform?

The Panelists

Phil Kerpen
Director of Policy, Americans for Prosperity
Maggie Mahar
Fellow and Writer, The Century Foundation's HealthBeat blog


Phil Kerpen: Taxes are too high already, especially on the small businesses that are the engine of job creation and economic growth. The House proposal of a 5.4 percent surtax on high income earners will, combined with Obama's repeal of the Bush tax cuts, push the top federal rate above 45 percent. Most so-called "wealthy Americans" are simply small business people who pay their business taxes on their regular tax returns. With payroll tax and state and local income taxes added in, there would be a huge disincentive to invest, grow, and hire new employees. That would prolong the recession and actually result in less revenue for the federal government. Taxes on so-called wealthy Americans—as proposed in the House bill—would also slam seniors when they sell their homes, calling them rich even if they have little or no other income just for realizing the value of their homes built up over decades. That's not right.

Maggie Mahar: Why is it fair to ask very wealthy Americans to help pay for health care reform? Take a look at this eye-popping chart, showing the effective tax rate for America's wealthiest households from 1993 to 2006.

Note that today, thanks to the Bush administration's tax cuts for the rich, the wealthiest 1 percent pay five percent less than they did in 1995. Unfortunately, we really couldn't afford Bush's largesse—the deficit ballooned. Now, reformers hope to finance universal health care without adding to a potentially ruinous deficit. This is why they propose hiking taxes on the wealthiest 1.2 percent of all Americans.

The House bill asks households reporting joint income over $350,000 to pay an extra 1 percent on earnings over $350,000; those earning over $500,000 would pay 1.5 percent; millionaires would pay a 5.4 percent surtax on earnings over $1 million. Over the past decade, the very rich enjoyed a windfall that added to a burgeoning deficit. It makes sense to ask them to help ensure that reform is deficit neutral.


Phil Kerpen: It's true that the effective tax rates for the rich have come down since 1993. Over the same period, however, the share of income taxes paid by the top 1 percent has skyrocketed, as this chart from the Tax Foundation shows. In 2007, the top 1 percent paid an astonishing 40.4 percent of all federal income taxes, more than the bottom 95 percent combined. According to the OECD, that makes our income tax more progressive than European social welfare states. This huge increase in taxes paid by the rich occurred over a period in which their effective tax rate fell. This is not coincidental: lower tax rates encouraged economic growth that led to big income gains for the Americans most productive at creating wealth, and that also helped flood the coffers of the U.S. Treasury. This occurred over a period of falling effective tax rates. Raising those rates could undermine the incentives to produce wealth, yield lower revenues and, ironically, make the U.S. income tax system less progressive.

Maggie Mahar: The health care surtax, which ranges from 1 percent to 5.4 percent chart from first statement, will affect only 4.1 percent of small business owners according to the House Ways and Means Committee—quoting the non-partisan Joint Committee on Taxation (JCT)

Moreover, 4.1 percent would be affected only if you use "the broadest definition of a small business owner (i.e., anyone with as little as $1 of business income.)" JCT notes.
Taking a close look at the 4.1%, JTC found that half earned less than one-third of their income from the small business.

As for an elderly couple selling their home, they pay no tax on the first $500,000 of profits. They would pay a 5.4 percent surtax only if their total income, including profits in excess of $500,000, equaled more than $1 million. Then they would pay 5.4 percent on the amount over $1 million.

Ultimately the surtax will hit the wealthiest 1.2 percent, and they can afford it: From 2002 to 2006, their incomes rose by roughly 42 percent.

Follow ups

Phil Kerpen: The Joint Committee on Taxation is notoriously biased in favor of higher taxes, and the 4.1 percent number is out of returns that include even one dollar of business income—a misleadingly large denominator. The Tax Foundation analyzed IRA data and found that those 4 percent of small businesses account for 60 percent of total business income, and that the surtax would hike business taxes $51.3 billion, a 24 percent increase. Billions of dollars cannot be extracted from small businesses without a substantial negative effect on wages and jobs.

An elderly single woman selling her home can exclude only $250,000 from tax. The new surtax starts at $280,000. This means a tax hike if her net-proceeds from her home (even if she has zero other income) exceed $530,000, a modest amount in many areas of the country, especially considering that it may be her only asset. That's a frighteningly expansive definition of "the rich."

It just goes to show that when Washington wants to spend trillions of dollars, they can't wring much more out of the top 1 percent that already pay 40 percent of the taxes. One way or another, it will come from the middle class.

Maggie Mahar: Yes, the top 1 percent pays a larger share of income taxes because their share of the nation's income has sky-rocketed. In 1993 they enjoyed 14 percent of the total; by 2006, they took 20 percent.

For over three decades, income has been redistributed upward.

Since 1975, the bottom 90 percent of the population has watched its income inch up by only 10 percent while the wealthiest 1 percent saw a 232 percent gain. Not because they are more productive, but thanks to the explosion of stock options for CEOs, a near halving of the top income tax rate, and cuts in inheritance and capital gains taxes. The top 1 percent now owns more than the bottom 95 percent combined yet pays only 40 percent of income taxes.

Finally, while elite Americans may pay more income taxes, wealthy Europeans pay VAT taxes as well as higher inheritance taxes and transfer taxes. The last two make their system more progressive.

The opinions expressed belong solely to the participants and do not necessarily reflect the views of NOW, PBS, or local stations. The facts stated by the participants have not been verified by NOW.