Hungry Hippo Health Care: Eating Up Your Savings
By Jacob Feldman • Friday, July 17, 2009 12:15 pm
The Congressional Budget Office has rung up the House Ways and Means Committee’s health care bill at a whopping $1.6 trillion dollars. So far, the primary revenue raiser is a surtax on married couples making more than $280,000 annually. The back-loading $544 billion surtax ranges anywhere between 1.4 and 5.4 percent. Unfortunately for America, the Democrats are still looking for another tax generator for another $1 trillion.
One possibility is applying the Medicare tax (1.45%) on investment income for individuals with wage incomes that exceed the cap on Social Security ($106,000). This tax would raise approximately $100 billion. With this tax, the Democrats would once again be picking on shareholders who are already facing higher taxes. When taxes go up in 2011, the capital gains and dividends tax will increase to 20%. Tacking on an additional 1.45% to the marginal tax rate will have a devastating effect on investment.
Why does investment matter? If you’ve taken an economics class, you know the formula: I = C + S. Very simply, the equation states that income is equal to consumption plus savings. Once you receive your paycheck, you either spend or save. The incentive for choosing savings over consumption is that you expect the future payoff to exceed any benefit of spending in the present. Savings is critical to reinvestment in physical and educational capital, ensuring long-run economic growth. A tax on capital gains and dividends is a tax on savings. It decreases the payout on investment and causes a decrease in stock value.
Very simply, an additional 1.45% tax on investment income decreases the stock value for all investors and discourages long-run economic growth. Imposing an investment tax on the people who invest the most is sure-fire recipe for a tasteless economy.
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