Tax Lawyer's Blog

Most economists agree that there is no way President Obama can fund healthcare reform without raising taxes on the middle class. But if he does that overtly he would be committing political hari-kari because it would require him to break his oft-repeated promise to give tax cuts to “95% of Americans.”

The Wall Street Journal reports on a backdoor middle-class tax proposal made by Senate Finance Committeee Chairman Max Baucus (D-MT) to impose a surtax on the purchase of medical devices and diagnostic equipment:

Supposedly the Senate’s version of ObamaCare was written by Finance Chairman Max Baucus, but we’re beginning to wonder if the true authors were Abbott and Costello. The vaudeville logic of the plan is that Congress will tax health care to subsidize people to buy health care that new taxes and regulation make more expensive

Look no further than the $40 billion “fee” that Mr. Baucus wants to impose on medical devices and diagnostic equipment. Device manufacturers would pay $4 billion a year in excise taxes, divvied up among them based on U.S. sales. This translates to an annual income tax surcharge anywhere from 10% to 30%, depending on the corporation.

And how did Mr. Baucus come up with the $40 million number? Apparently he yanked it out of the air:

Why $40 billion? No reason in particular, except that Mr. Baucus needs to finance nearly $900 billion in new spending and so he’ll grab anything within arm’s reach.

While there are some exemptions, such as tongue depressors and eyeglasses, most of the devices tax will fall on hundreds of thousands of products that are basic components of modern medicine. Some are routine—surgical equipment, diabetes testing supplies—while others are cutting-edge technologies, like replacement joints, pacemakers, stents, and MRI and CT scanners.

And of course this surtax will be passed on to consumers thereby – you guessed it - increasing the cost of healthcare:

This new tax will eventually be passed through to patients, increasing health-care costs. It will also harm innovation, taking a big bite out of the research and development that leads to medical advancements.

The core of the industry (excluding a few conglomerates like Johnson & Johnson) spent about $9.6 billion on product development in 2007, according to Ernst and Young. The Baucus tax is nearly half that, and also exceeds $3.7 billion, the total venture capital invested in device makers that same year.

Again, politically Obama and the Democrats can’t impose a direct tax on the middle-class.

So what’s the solution? Don’t do it directly.

The President has boxed himself in and now he and the Democrats, in order to fund their spending extravaganzas, must come up with creative ways to tax the average American through the backdoor.

That is what Senator Baucus’s medical device tax is all about and that is what these silly soda and bad food taxes are all about.

As we get closer to healthcare reform taxpayers should expect Obama and his pals in Congress to increase their efforts to covertly tax the middle-class.

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