Health bill would deliver pre-Reagan tax rates

Small-business owners are warning that the economy would suffer under a health care bill proposed by House Democrats, which would drive tax rates for high-income taxpayers to levels not seen since before President Reagan’s tax reform of 1986.

The top federal income tax rate, which Mr. Reagan and a bipartisan Congress lowered from 50 percent to 28 percent, would reach 45 percent in 2011 if Congress and President Obama enact the surtaxes that are part of the health care reform plan that House Democrats announced Tuesday.

Small-business owners, who would take a direct hit from the surtaxes, expressed dismay over the proposal, saying it would force them to curtail hiring and reduce wages amid the worst recession in a generation.

“If they institute a 5 percent surtax on income, it will have a severe impact on small businesses that are already hurting,” said Michael Fredrich, whose Wisconsin company, MCM Composites, molds plastic parts.

“We run maybe three days a week, sometimes four days a week, sometimes zero days,” he said. “I can tell you that at some point, people … running a small business are just going to say, ‘To hell with it.’ ”

Not everybody is worried about the proposed tax’s impact on business.

“Most small businesses are small and would be completely unaffected by the surtax on high-income people,” said Chuck Marr, director of federal tax policy at the liberal Center on Budget and Policy Priorities (CBPP).

Polls show most Americans support raising taxes on the rich. However, the last time Democrats pursued that agenda in 1993, when they raised the top federal income tax rate from 31 percent to 39.6 percent, they lost their congressional majorities in both chambers the next year.

The current top federal income tax rate, established under President George W. Bush, is 35 percent.

Throughout his presidential campaign, Mr. Obama pledged to restore President Clinton’s top income tax rates of 36 percent and 39.6 percent. About 2.2 percent of filers with small-business income would be affected by this proposal to allow the top two marginal tax rates to return to pre-Bush levels after 2010, when the 2001 tax cuts are scheduled to expire, Mr. Marr said.

A new surtax of 5.4 percent in the health care bill, which would apply to married couples’ income above $1 million, would bring the top federal income tax rate to 45 percent.

After consideration of state and local income taxes and the Medicare payroll tax, which applies to all wage and salary income, taxpayers in 39 states would face a top marginal income tax rate of more than 50 percent, according to a study by the Tax Foundation, a nonprofit tax research group based in the District.

“That means government would be taking more than half of every additional dollar from high-income taxpayers,” said Tax Foundation President Scott Hodge. “The lowest tax rate would be 47 percent - and that’s in the nine states that don’t tax wages.”

Businesses say the surtax would hurt the economy.

“The intention of this plan is to tax high-income households, but the real victims would be America’s small-business owners,” said Thomas Donohue, president of the U.S. Chamber of Commerce. “Placing a big tax burden on the small-business community would rob them of the resources they need to create the jobs that will lead us out of the recession.”

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