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Taxing Healthcare: Income Distribution by Another Name?

Democrats in the House have rolled out an ambitious $1 trillion plan to fund healthcare reform that forces businesses and wealthier Americans to pick up the costs with higher taxes.

Surgeons
AP
Surgeons

But while the House bill proposes revenues for healthcare, some analysts say the real goal could be to re-distribute income for an ailing economy.

"The tax increase will put the tax code to pre-Reagan days," says Chris Dolan, a professor of political science at Lebanon Valley College in Pennsylvania.

"On the whole, what the bill is trying to do is move the tax code back some 33 years when it was higher," says Dolan. "It's tax increases under the guise of healthcare reform to help the economy."

According to Dolan, there's nothing in the House bill that would keep the government from using the tax increases to fund spending on other projects. "I’ve just looked at the House version and there’s nothing in there that says the money is only earmarked for healthcare," says Dolan.

The bill is working its way through Congress as the House Ways and Means Committe voted Friday in favor of the measure. Republicans and three Democrats on the committe failed in their efforts to remove any of the tax increases. The Senate is working on its own version of a healthcare reform bill.

"In fairness, to Obama, it's not his bill," says Al Waxman CEO and senior managing member, Psilos Group, a venture capital firm for the healthcare industry. "But it clearly puts people in a situation that looks like some are in favor of wealth re-distribution."

John Barrie, a tax expert at the law firm of Bryan Cave LLP, also sees the House proposal as a move to increase overall taxes on the wealthy.

"I think the administration wants to raise taxes on the rich," says Barrie. "Previous earmarks for a segmented tax increase have not been as blatant as this."

(Calls and e-mails to the House Ways and Means Committee,as well as to the office of Rep. Henry Waxman (D-Ca), a main sponsor of the bill, for comment on possible tax re-distribution were not returned.)

As for the bill itself, healthcare taxes would raise an estimated $544 billion over ten years with these increases among the proposals:

  • 5.4 percent tax increase on individuals making more than $1 million
  • A gradual tax beginning at $280,000 for individuals, $350,000 for couples
  • Employers not providing coverage face penalty of up to 8 percent of all their worker's wages
  • Individuals who decline affordable coverage would pay 2.5 percent of incomes as penalty, up to average cost of a health insurance plan

Whether the taxes are used for healthcare or not, analysts say the proposals as they stand would do nothing for a struggling economy.

"The taxes will have an adverse affect that will hurt the bottom lines of small businesses," says Patrick Paule, an employee benefits consultant at Savage & Associates. "The taxes small businesses have to pay will limit wages and bonuses and force them to cut jobs. That will have a negative impact on the economy."

And wealthier Americans targeted to be taxed are sure to push back, says Paule.

"Knowing that most of these individuals making in excess of $280,000 a year are corporate executives and business owners, they will be fighting to stop the increases. They get hit both as individuals and business owners with the taxes."

Americans spent $2.4 trillion on healthcare in 2008, according to the Congressional Budget Office. That spending is projected to reach $4.3 trillion by 2016, far more than the $544 billion expected from the tax increases.

Experts also say that along with hurting the economy, the tax increases won't do the job they're intended for.

"This wouldn’t even cover the amount of the cost of healthcare," says Gary Milkwick, director of operations for the Tax Club, a tax counsel for small businesses. "They are not going to have enough money. They are way short of what they want to achieve."

But if it comes to paying higher taxes for healthcare, the nation's middle class has no problem with wealthier Americans footing the bill, says Robert Blendon of the Harvard School of Public Health and the Kennedy School of Government who conducted a survey on funding healthcare.

Healthy Horizons -- A Special Report
Healthy Horizons -- A Special Report

"What people in the middle believe is that those who were well off while they suffer in the recession, should pay for healthcare," says Blendon.

Some 70 percent of those recently surveyed by Blendon favored increasing income taxes on people making more than $250,000 a year. "The only other approach that won such approval, 72 percent, was raising taxes on cigarettes," Blendon says.

For their part, Democrats say the tax increases will affect only 4.1 percent of tax filers who report small business income and apply to only the top 1.2 percent of households or those who earn one-quarter of all income.

However, raising taxes on anyone to pay for healthcare could have huge political costs for Obama, says Bridget Crawford, a professor of law and associate dean at Pace Law School.

"If he supports this, he's playing into Republican fears with the tax increases," says Crawford. "They accused him of being a tax and spend liberal during the presidential campaign and he's falling right into that."

As to what should be done to resolve the healthcare problem, most analysts say raising taxes is not the way to go. "The whole idea of health care reform is to have people do a better job of managing healthcare costs," says Al Waxman. "I don’t see how raising taxes does that."

"Costs of care are the culprit," says Patrick Paule. "If I increase your taxes or force you to buy insurance does that lower the cost of an MRI or cancer treatment? Absolutely not."

"Raising taxes might help fund the deficit, but it won't help out on healthcare costs," says John Barrie. "But I don’t think it will go through. The Senate side will not accept what the House is proposing."

Convincing taxpayers to lend a hand to others in a sick economy is probably the biggest hurdle of all to the House plan, says Pace Law's Bridget Crawford.

"It's the wrong time to be asking people to foot this bill," says Crawford. "Even if people have homes and make good money these days, they still might not feel like they can help pay for other people's health insurance."