'Rich' Taxes Cripple Small Towns

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VEVAY, Indiana -Here in the heartland of America, residents of Vevay (population 1,700) are united against tax increases that congressional Democrats have proposed to pay for health care reform. They believe that tax hikes will cause more job losses and reduce tourism here in the southeastern part of the Hoosier state, and elsewhere in countless towns across the land.

Indiana's unemployment rate, 10.7%, is above the national average of 9.5%, and its tentative budget deficit (in fact, the budget must be balanced) is forecast to hit $1.1 billion in 2010, 7.5% of projected spending.

Vevay's residents don't understand why the federal government would try to worsen the economy by raising taxes.

In last night's news conference President Obama did not mention that the health care bill under consideration in the House of Representatives would levy an 8% tax on the payrolls of employers who do not offer health insurance to their workers-because the tax is unpopular. Employers with more than $250,000 in payroll would face a 2% rate, rising to 8% when payroll reaches $400,000.

To avoid the tax, employers would have to adopt health insurance plans that match the proposed public plan that President Obama endorsed last night as suitable for members of Congress, covering all hospital and physician services, mental health coverage, and substance abuse, with no co-payments for preventive visits like regular check-ups. Such coverage might be more expensive than an employer's current plan.

The House bill, crafted by three committees, has yet to come to a floor vote. Two Senate committees are drafting bills, with floor action before the scheduled August recess doubtful. So it could be well into autumn before a House-Senate conference tries to reconcile the two chambers' respective bills.

In addition to the expiry of the Bush tax cuts, resulting in tax increases in January, 2011, the House bill would impose income tax surcharges on all persons making over $350,000 of adjusted gross income. The surcharge starts at 1% and rises in steps to 5.4% on income above $1 million. With such a surtax, the top federal tax rate would climb to 45%, and in some states the combined federal, state, and local rate would exceed 50%.

The small business owners of Vevay regard these proposed taxes as a recipe for more jobs lost. Lisa Fisher, owner of the Schenk Mansion Bed & Breakfast Inn, is a cancer survivor who pays for her own health insurance and doesn't see a need for the government to offer insurance. "I don't mind paying my fair share of taxes," she told me, "but the government would rather tax me to death."

She explained that taxes would hurt the Vevay economy because everyone here is a local business owner. Recent growth in tourism has benefited Vevay and Mrs. Fisher would like to expand and hire more staff. But if taxes rise, she would just be punished for her efforts, so she is not planning to expand.

"I've never got a job from a poor man in my life," Mrs. Fisher told me. "When you stop the guy at the top from making a dollar, he'll shut down and just live well."

Anita Danner, co-owner with her husband Mike of Danner's Hardware Store, on Ferry Street, in business since 1837, is also against tax increases. Another small business owner who buys her own health insurance, she told me that if she had to pay the 8% tax on her employees then she and her husband would close the store. "Taxes and government intervention don't solve many problems," she said.

Two blocks away, on Main Street, Barbara Dowdy of the Julia Knox Gift House, a store smelling of scented candles, said, "I don't think in times like this recession that it's the time to raise taxes. It would make small business close down. They are limited in what they can pay."

Lisa Fisher, Anita Danner, and Barbara Dowdy are considered to be among the beneficiaries of a new public health insurance plan and additional regulation for insurance companies because they must buy their own insurance. Sponsors of the bill do not trust the private sector to offer insurance. Yet, all three believe that the proposed tax increases would have major disadvantages.

Will history repeat itself in the United States in 2009 or 2010? Some economic historians believe that President Franklin Roosevelt's tax hikes, in particular the Wealth Tax of 1935 and the Undistributed Profits Tax of 1936, worsened the Great Depression by making it harder for firms to accumulate capital for expansion. This was the conclusion of a 1983 study by a young Stanford economics professor, Ben Bernanke, now chairman of the Federal Reserve.

This issue is examined by Amity Shlaes, senior fellow at the Council on Foreign Relations, in her 2007 book The Forgotten Man, the definitive history of the Great Depression. "Although FDR railed against "economic royalists,"" she told me on Tuesday, "he also endorsed regressive taxes such as taxes on gasoline and liquor, and payroll taxes on Social Security."

Members of Congress need to get out of Washington, go home to towns such as Vevay, and hear from real people about how higher taxes will raise unemployment and hurt small business.

Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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