House Speaker Nancy Pelosi (D-Calif.) is doing some magic math to make the budget numbers work for the proposed health care reform plan.
She now calls income of $350,000 "middle class." House Democrats, according to news reports, are considering a $544 billion health care surtax on families that earn more than $350,000 a year, but Speaker Pelosi wants to raise the income threshold to $1 million for joint filers.
"According to Madam Speaker, I guess a household in the top 1 to 2 percent of the nation is now middle class," writes Gerald Prante on the Tax Foundation's Tax Blog.
"Considering that in 2007, only 15 percent of households in Manhattan made more than $200,000, I personally wouldn't even say that a cash income of $200,000 is middle class in the U.S., let alone $350,000."
A coalition of low-income and high-income voters — though not millionaires — helped elect President Obama last fall. Democrats don't want to tax voters in the high-income groups who are not quite millionaires so as to not disturb their new coalition, Prante notes.
"Under a static score, if Congress wants to raise the same amount of revenue for a surtax by only taxing income beyond $1 million ($800,000 for singles), then the required top rate would likely exceed 6 percent," writes Prante.
"That being said, just because the taxes are levied on tax returns making over a high threshold does not mean that others are correct to say that the surtax doesn't affect others."
Tax distributional tables typically assume that the burden of the federal individual income tax is equal to the legal burden, Prante notes.
However, given the amount of S-Corp and other businesses activity that are at the high-level and given that it is partially a tax on capital, whatever assumption you make about the long-run incidence of a tax on return to capital, others outside the top will still be affected, Prante adds.
"If we reduce the rate of return for S-Corps, we should expect capital investment to leave S-Corp dominated industries — or S-Corps to restructure but still facing a higher burden than otherwise — and thereby increase the supply of capital in other industries," Prante writes.
"But over the long-term, the rates of return in all industries would equalize, and the return to all owners of capital would thereby be reduced by the S-Corp tax increase. This is even assuming that capital stays within the borders of the U.S., and thereby labor does not face reduced wages."
Thus, concludes Prante, all owners of capital, including people beyond just the top 1 to 2 percent that would be hit by the proposed surtax, would be affected by the surtax.
Redefining middle-class income is an interesting exercise but it may not pay for healthcare, the cost of which is likely understated, nor will the new taxes increase economic growth in a struggling economy.
Randall Forsythe notes in Barron's that the economic recession is expected to last at least another five months and, when growth resumes, that growth will be at just “a 1 percent rate” even while unemployment soars to 11 percent from its current 9.5 percent rate.
Less employed, less earning. Fewer people to tax.
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