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Phil Kerpen – – July 15, 2009

Guess what? Everything we’ve ever heard about the Democrats plan for health care reform is true. And it’s not a pretty picture.

The House Democrats released their long-awaited draft health care reform bill today, and every rumor about what tax hikes would be included was true–and then some. My friend Ryan Ellis over at Americans for Tax Reform posted the details.

The big shocker is that the surtax on high-income earners, including small businesses, is much steeper than the rumored 3 percent that I talked about in my podcast yesterday. Instead it’s 5.4 percent. Not of taxable income, mind you, but of adjusted gross income. That means the tax applies to income that was spent on home mortgage interest, medical expenses, property taxes, charitable contributions, and nearly everything else currently deducted from taxable income.

Combined with President Obama’s plan to repeal the Bush tax cuts on schedule in 2011, this would mean hiking the top marginal capital gains tax rate from 15 percent to 25.4 percent–much higher than Obama promised on the campaign trail, and near the 28 percent rate from before the 1997 Bill Clinton tax cuts. Such a tax hike would slam the brakes on capital formation and wallop capital markets with another gut punch just as they are finally beginning to recover from the financial crisis. It would also dramatically inhibit badly needed business investment.

The tax hit on capital gains, however, would pale compared to the new top rate on ordinary income, already scheduled to go from 35% to 39.6 percent in 2011, but now pushed up to 45 percent with the new surtax, and actually substantially higher than that as a percentage of taxable income because the new 5.4 percent surtax is applied to AGI.

Such punitive income tax rates would be a huge impediment to business activity throughout the economy, especially for the small and medium-sized business that create nearly all of the new employment that we need to lead us out of the recession.

And it actually gets a lot worse. Employers would also be mandated to provide health insurance under the bill, and the cost of health insurance would likely skyrocket because of new regulations called guaranteed issue and community rating. The only alternative, which many companies would either be forced into by cost considerations or choose for simplicity, would be to pay a payroll tax of as much as 8 percent. That’s on top of the existing 15.3 percent payroll tax for Social Security and Medicare, creating a new total payroll tax of 23.3 percent.

There would also be a new tax on individuals who don’t have health insurance, flying in the face of President Obama’s key primary campaign promise not to require people to be insured. That tax would be another 2.5 percent of AGI.

These eye-popping numbers, of course, don’t include state and local taxes, which are also rising in most of the country.

The tax hikes in this bill represent the last piece of the puzzle–along with loose monetary policy and high government spending–to repeat the key economic blunders of the 1970s, with all the misery that came with them.

Phil Kerpen is director of policy for Americans for Prosperity, which runs the anti-stimulus Web site He can be reached through and his free daily podcast is available here.

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