Sunday, October 30, 2011

Obamas 9-9-9 Tax Cut | For the Blind

***2nd Revision***

Even our brightest may be deceived! ~Anonymous Blogger -

By: Larry Walker, Jr. -

Continued from: 3rd Concern with the 9-9-9 Plan -

Mr. Cain’s main argument against the fact that his plan redistributes wealth from the poor to the rich is that, “it does no such thing.” But what does that mean? Simply stating “it does no such thing” doesn’t satisfy the anxiety. The real concern is that since the top 1% of income earners pay 38% of all income taxes, and because the 9-9-9 Plan reduces their tax rate by 74%, while at the same time exempting empowerment zone residents, that either a greater burden of taxes will be borne by the middle class and working poor, or the United States will go down in flames in a matter of weeks instead of years.

According to a study on GOP flat tax proposals conducted by the non-partisan Tax Policy Center, the 9-9-9 Plan would cause '95 percent of people making $1 million or more to receive tax cuts averaging $487,300'. The dilemma is that since Mr. Cain claims his plan to be revenue neutral, that is to say, the amount of total taxes collected today will be the same under his plan, then where will the money come from to make up the shortfall? You guessed it! From the same study conducted by the Tax Policy Center –

“Only 16 percent of people making between $50,000 and $75,000 a year would get a tax cut, averaging $1,959, and at least 70 percent of people in this middle-income category would see their average federal taxes rise by $4,326.”

So I guess Mr. Cain better hope that the middle class, who are busy working everyday and taxed enough already, aren’t paying too much attention to his claims. But I don’t think that’s the case. Perhaps Mr. Cain needs to go back to the drawing board. So here's what the Obamas actual 2009 tax return would look like against the 9-9-9 Plan.

When you remove a 15.3% payroll tax, a 35% corporate tax, and a 35% individual tax and replace them with 9-9-9, it doesn’t measure up. In order for the Obamas to make up the shortfall they would have to spend $14,755,022 on items subject to the 9% national sales tax (take the tax cut of $1,327,952 and divide it by 9%). That’s almost 3 times their current gross income. So unless the Obamas run out and buy a new house, or otherwise figure out how to spend 3 times more than they make, on items subject to the sales tax, that revenue will never come back from them. The government will either go broke, or the middle class - 70% of those making $50,000 to $75,000 - will really end up paying $4,326 more in taxes, just like the Tax Policy Center said.

As you know (or maybe not), like many others, not all of the Obamas income is from wages paid by an employer. Actually all $374,460 of his wages were paid by US taxpayers. The other 9% tax on his self-employed business income is already included in the table. Obama's business didn’t really have any expenses, so no sales tax would be collected there. So did taxing the Obamas self-employed business income the other 9% make up the shortfall? No. So will the 9-9-9 Plan tax the federal government for the other 9% on Obama’s wages in addition? No.

Does the federal, or do state and local governments even pay income taxes? No. So under the 9-9-9 Plan, what tax return will government entities not be allowed to deduct wages from? When it comes to government workers, their employers will not be paying the other 9%, because their employers don’t pay income taxes. You can add other tax exempt organizations to that list as well. And when it comes to the self-employed, and small business owners, some will benefit and some won’t. Those who make more than $330K will clearly benefit more under 9-9-9, while most everyone else will pay higher taxes. That’s why this dog won’t hunt.

By proof, policies have consequences - The 999-Plan will create a host of unintended social problems which naturally occur on the other end of Laffer’s curve. Giving average tax cuts of $487,300 to 95% of people making over $1 million per year, and increasing the tax burden on the working poor and middle-class, solves nothing. Yes I am a conservative, and if you don’t believe it then read the rest of my blog. I’m not too sure how to classify Mr. Cain’s 9-9-9 Plan, but from my point of view, 9-9-9 is not a conservative plan, and not something that conservatives should even be considering. Had Mr. Cain not risked his entire campaign upon this flimsy reed; he might have had my support. But if Herman Cain is somehow able to win the Republican Party nomination, I’ll be casting my vote for the first viable 3rd party candidate.

Source:

http://www.whitehouse.gov/sites/default/files/president-obama-2010-complete-return.pdf

Related:

3rd Concern with the 9-9-9 Plan

Herman Cain’s 9-9-9 Sham

Saturday, October 29, 2011

3rd Concern with the 9-9-9 Plan

Conservatives vs. 999ers -

By: Larry Walker, Jr. -

Under the 9-9-9 Plan, “95 percent of people making $1 million or more would get a tax cut that averaged $487,300.” ~Tax Policy Center -

At a Michigan website entitled, North Star Writers Group, Herman Cain attempted to address some of the criticism to his 9-9-9 Plan. The article, dated October 16, 2011, is entitled, "9 responses to 9 false attacks on the 9-9-9 plan". But somehow Mr. Cain has confused what is merely constructive criticism with “attacks”. I mean it’s as if when one asks Mr. Cain a valid question these days, he either gets it wrong the first time, or he simply pulls the ‘assault card’. Yet, after I criticized Mr. Cain’s plan (not him personally), when I wrote an article entitled, "Herman Cain’s 9-9-9 Sham", I was personally labeled as a Marxist, Communist, as naïve, an idiot, and a left-wing shill. And all of that came from fellow, so called, conservatives. So has Mr. Cain's plan really been “attacked”, or are perhaps the 9 concerns, which he deems to be false attacks, simply valid points?

Personally, I think that when conservatives start calling fellow conservative’s naïve, Communist, Marxist, idiots, and left-wing shills somebody’s got a problem. To contrast, the article I wrote immediately prior to my critique of Mr. Cain’s tax plan was entitled, "Obamacare’s Deadweight Loss", and with that I was practically branded as a conservative champion, by way of private commentary. But apparently, sometime between October 12th and October 23rd, I either lost my mind, or I unwittingly signed on with the Communist Party USA. I’ll let you decide. Okay, so today I’m not going to list all 9 of the concerns that many have with the 9-9-9 Plan, but just the 3rd, and Mr. Cain’s response.

Claim 3: The plan redistributes wealth from the poor to the rich.

Response: “It does no such thing. It is fair and neutral, taxing everything once and nothing twice. What’s more, we are getting ready to propose empowerment zones for economically struggling areas in which the rates will be even lower. That will allow the poor to benefit even more from the plan than they already would.”

Mr. Cain’s main argument against the fact that his plan redistributes wealth from the poor to the rich is that, “it does no such thing.” But what does that mean? Simply stating “it does no such thing” doesn’t satisfy the anxiety. The real concern is that since the top 1% of income earners pay 38% of all income taxes, and because the 9-9-9 Plan reduces their tax rate by 74%, while at the same time exempting empowerment zone residents, that either a greater burden of taxes will be borne by the middle class and working poor, or the United States will go down in flames in a matter of weeks instead of years.

Also, according to Mr. Cain, “it is fair and neutral, taxing everything once and not twice”. But this is simply not true. As proof, since the 9-9-9 Plan doesn’t allow businesses to deduct wages in determining taxable income, it in effect imposes a 9% tax on wages at the corporate level, and then taxes wages again at the individual level. So how is this not taxing something twice? And further, when the same wages are spent into the economy, they are hit again by a 9% national sales tax. So wages are not only taxed once or twice under Mr. Cain’s plan, but at least three times. Following are two hypothetical examples of what the 9-9-9 Plan will accomplish when it moves from Cain's chalkboard to the real economy.

Example 1

For example, in the table below, a couple has wages of $1,000,000 and only claims the standard deduction and personal exemption(s). Under the current tax code they would pay federal taxes of $334,043, and only $90,000 under the 9-9-9 Plan. Thus, under Mr. Cain’s plan, this couple would receive a tax cut of $244,035. And in order to make up for the shortfall in revenue, by way of his national sales tax, the couple would need to spend $2,711,500 (244,035 / .09) on items subject to the 9% sales tax, or almost three times the amount of their earned income.

Example 2

Since under the current tax code, the taxpayer’s in the first example are already in a 35% marginal tax bracket, if they earned an additional $1,000,000, they would pay federal taxes of $698,543 under the current tax code, versus $180,000 under the 9-9-9 Plan. So under Mr. Cain’s plan, this couple would receive a tax cut of $518,543 (see table below). And in order to make up for the shortfall in revenue, by way of the national sales tax, the couple would need to spend $5,761,588 (518,543 / .09) on items subject to the 9% sales tax, or almost three times the amount of their earned income.

According to a study on GOP flat tax proposals conducted by the Tax Policy Center, the 9-9-9 Plan would cause '95 percent of people making $1 million or more to receive tax cuts averaging $487,300'. The dilemma is that since Mr. Cain claims his plan to be revenue neutral, that is to say, the amount of total taxes collected today will be the same under his plan, then where will the money come from to make up the shortfall? You guessed it! From the same study conducted by the Tax Policy Center –

“Only 16 percent of people making between $50,000 and $75,000 a year would get a tax cut, averaging $1,959, and at least 70 percent of people in this middle-income category would see their average federal taxes rise by $4,326.”

So I guess Mr. Cain better hope that the middle class, who are busy working everyday and taxed enough already, aren’t paying too much attention to his claims. But I don’t think that’s the case. Perhaps Mr. Cain needs to go back to the drawing board.

Laffer’s Folly

In a second article written in the same venue entitled, “Arthur Laffer brings reality to 9-9-9 discussion”, Mr. Cain states that, “Contrary to some of what you hear in current conversation, the theory of the Laffer Curve was proven correct when Ronald Reagan cut marginal tax rates across the board in 1981, and federal revenues soared. So did deficits, of course, and that’s the part you usually hear about. But that’s because federal spending soared even more. Excessive spending, not insufficiently high tax rates, was the problem then and it’s still the problem today.”

Notice how Mr. Cain implies that it was “not insufficiently high tax rates” that was the problem back then, or today. That’s a double negative, but doesn’t Mr. Cain’s statement refute his own plan? If tax rates are not the problem today, but rather excessive government spending, then why are we even talking about a 9-9-9 Plan? A few month’s ago, conservatives were in unity behind a platform of not raising the Bush tax rates, and reducing government spending. Yesterday it was, “We don’t have a revenue problem; we have a spending problem.” But now, suddenly, it seems that many conservatives believe that all of our problems can be solved through Mr. Cain’s proposed wealth displacement. So does Mr. Cain’s plan balance the federal budget? Will it fix Social Security and Medicare’s solvency issues? If the answer is no, then what is the point?

Laffer’s curve - In the 1981 Act, Reagan cut the top tax rate from 70% to 50%, and closed many loopholes. He didn’t propose cutting the top rate to 9% and adding a 9% national sales tax. Reagan later raised the bottom rate from 0% to 15%, and cut the top rate down to 28%. But his plan was reasonable, while Cain's proposition is extreme. On its own merits, the 9-9-9 Plan is extreme enough to fall off the other end of Laffer’s curve. Laffer defined a sweet spot somewhere in the middle - as when tax rates are too high, tax revenues decrease, and when tax rates are too low, tax revenues decrease, but when tax rates are just right, revenues will increase. But I believe that Cain's plan overshoots the sweet spot by a long shot. In other words, if Reagan Era tax rates were the mark, and I believe that they were, then why not just bring them back?

Policies have consequences - The 999-Plan will create a host of unintended social problems which naturally occur on the other end of Laffer’s curve. Giving average tax cuts of $487,300 to 95% of people making over $1 million per year, and increasing the tax burden on the working poor and middle-class, solves nothing. Yes I am a conservative, and if you don’t believe it then read the rest of my blog. I’m not too sure how to classify Mr. Cain’s 9-9-9 Plan, but from my point of view, 9-9-9 is not a conservative plan, and not something that conservatives should even be considering. Had Mr. Cain not risked his entire campaign upon this flimsy reed; he might have had my support. But even if Herman Cain is somehow able to win the Republican Party nomination, I’ll be casting my vote for the first viable 3rd party candidate.

Related:

Herman Cain’s 9-9-9 Sham

Sunday, October 23, 2011

Herman Cain’s 9-9-9 Sham

More Questions than Answers -

By: Larry Walker, Jr. -

Herman Cain argues that the reason we need his 999-Plan is because the tax law is too complicated. But is it really? I’ve worked with the tax law for 30 years, and I don’t think it’s all that complicated. It may have some complex calculations, mainly related to a few special write-offs and credits, but the basic bedrock of the Internal Revenue Code isn’t at all complex. Following Cain’s logic, if the tax law is so complicated that it needs to be “thrown out” and replaced, then isn’t our entire legal system similarly complex? If you answered yes, then why not just throw out the entire United States Code, shut down all courts including the U.S. Supreme Court, and just substitute the 10-Commandments. Would that work for you? If not, then why would you be in favor of Herman’s Cain’s overly simplistic 9-9-9 Tax Gimmick?

Business Taxes

Under present tax law, business expenses that are ordinary and necessary for the production of income are deductible for income tax purposes. The reason such expenses are deductible is because they represent taxable income to the recipient. There’s nothing really complicated about this. Expenses such as wages, advertising, office supplies, vehicle expenses, postage, legal and professional fees, commissions, rental payments, utilities, uniforms, travel, meals and entertainment, telephone usage, insurance, licenses, interest expense, benefits costs, retirement plan contributions and others, which are incurred for the production of income, are deductible for federal tax purposes. Although state and local governments are exempt from federal income tax, a deduction for state and local taxes is also allowed, under the theory that taxpayers should not be taxed at the federal level on taxes paid locally. All such expenses are likewise deductible in determining an entity’s profitability under general accounting principles. Where the law gets complicated, as far as business taxes are concerned, is when it comes to accelerated depreciation and general business credits.

Accelerated Depreciation

The reason fixed assets are depreciable is that each has a limited useful life, so the cost is spread over the life of the asset. For example, a computer has a useful life of 3 years, such that at the end of three years it generally needs to be replaced, so a business is allowed to write-off the cost over a three-year period. However, special gimmicks have been instituted over the years to accelerate the write-off of assets, such as the Section 179 deduction, and 50% or 100% bonus depreciation, whereby at least half or the entire cost may be written off in the year of purchase. If society wants to get rid of the accelerated depreciation loophole, then all that’s required is for the legislature to change the law back to regular straight-line depreciation. It doesn’t take a genius to figure that out, nor does it require throwing out the entire tax code.

General Business Credits

The other place that the law departs from reality is when it comes to tax credits. General business credits are special privileges which allow a company to receive direct tax credits over-and-above the normal deduction. For example, under the new Small Business Health Care Credit, where a business would normally be able to deduct the costs incurred for its portion of employee’s health insurance, a tax credit may now be taken over and above the regular deduction. Where it gets complicated is in determining which businesses qualify for the credit. In order to qualify a business can have no more than 24 full-time equivalent employees, and the average amount of wages paid per employee cannot exceed $49,999 per year. To obtain the maximum credit, a business can have no more than 10 full-time equivalent employees who are paid an average of less than $25,000 per year.

To determine whether one qualifies for the Health Care Credit, a business must be able to calculate the number of full-time equivalent employees and the average amount of wages paid based on complex formulas. Further complicating matters, the business must include and exclude certain types of employees and certain wages. Finally, if the business does qualify, it must subtract the amount of the tax credit from the amount of the normal deduction. For more on this, see Obamacare’s Effect on Small Business. If Americans wish to get rid of the smorgasbord of general business tax credits, it could be accomplished through legislation. It doesn’t take an Occupy Wall Street protest, or a 999-Plan to make this change. All that’s required is leadership.

Getting rid of accelerated depreciation and general business credits would go a long way toward tax simplification. Once accomplished, tax rates may be reduced to more tolerable levels. It doesn’t take a genius or a 999-Plan to accomplish this.

Problems with Cain’s 9% Business Flat Tax

The most egregious problem with Herman Cain’s plan involves wages. Under current tax theory, when a business pays wages, the employee bears the tax responsibility, not the business. But under Cain’s upside-down theory, businesses will not be allowed to deduct wages from gross income, unless they reside in empowerment zones. So in effect businesses will bear a 9% tax burden on the wages and salaries that they pay, and in addition employees will incur a 9% tax on the same. The double taxation of wages in the 999-Plan represents not only a huge departure from basic income tax theory, but from common sense.

Interest expense is currently deductible for income tax purposes as it represents taxable income to the recipient. But under Cain’s theory, interest will no longer be deductible by the borrower, yet it remains taxable to the lender. This is also an extreme departure from common sense. Under Cain’s theory, a corporate officer who loans money to a majority owned company would be taxed on the interest income received, while his company would incur a 9% tax on the same. Who wants to pay a 9% tax on the interest paid to banks and other lenders? It’s not personal, it’s the principle...

Contributions to employee retirement plans are currently deductible for income tax purposes, because they represent future taxable income to the recipient. But under Cain’s plan, company contributions to retirement plans are apparently not deductible for tax purposes. In effect businesses will bear a 9% tax on such contributions and the recipient will bear another 9% tax upon the withdrawal. Again, this form of double taxation represents an extreme departure from basic income tax theory.

Employer paid health insurance premiums are currently deductible for income tax purposes, and not counted as income to employees, although theoretically it should be taxable to employees. But under the Cain plan, employer paid health insurance premiums will apparently not be deductible. In effect, employers will pay a 9% tax on top of the amount paid towards employee’s health insurance benefits. So an employer will be taxed whether or not it provides health benefits. Since there won’t be any incentive for providing health care coverage under the 999-Plan, what will occur? Will companies continue to pay for health benefits plus 9%, or will they just keep the money and pay the 9%? Absent any other requirements, what would you do?

9% Business Flat Tax

“Gross income less all purchases from other U.S. located businesses, all capital investment, and net exports.”

Since Cain doesn’t define the term, “purchases”, what exactly does the above statement mean? Volumes could be written to define this simple statement. For example, does the term “purchases” include services or is it limited to products? If a company buys supplies such as paper and toner, from other U.S. based businesses, are these items deductible, or does deductibility only apply to purchases of goods for resale? If a company employs the services of another business, are such services deductible as purchases? I only ask because if that’s all there is to the proposed tax code, then it’s not clear whether this statement applies to the purchase of services, goods at retail, goods at wholesale or all of the above.

Retail businesses presently buy goods at wholesale, paying no sales tax upon the purchase, but then charge sales tax upon resale. However, service companies buy their supplies at retail; as such products are for internal use and not for resale. Services are not subject to sales tax at the State level, but will they be under the 999-Plan? Will both retailers and service businesses have to pay the 9% national sales tax on U.S. purchases, or are retailers exempt, or are both exempt? If both types of businesses have to pay the national sales tax, then even if such purchases are deductible for income tax purposes, they will have already been subject to a 9% national sales tax upon purchase. The point is that the first half-sentence of Cain’s proposal, by itself, necessitates a myriad of rules, regulations and definitions.

“For if the trumpet gives an uncertain sound, who shall prepare himself for the battle?” ~1 Corinthians 14:8

Next, according to Cain, the amounts spent on capital investments will be deductible under his 999-plan. But Cain doesn’t define what he means by the term, “capital investments”. Although he has publicly referred to this passage as meaning the purchase of equipment, he hasn’t defined any limitations. Does this apply to new or used equipment, or both? Capital assets include all tangible property which cannot easily be converted into cash and which is usually held for a long period, including real estate, equipment, etc. Under current law, buildings and other commercial real estate are generally depreciable over a 39 year lifespan, while land is never depreciable. But since Cain doesn’t go into detail, and because he wants to “throw out” the current tax code, we have to ask, will a business be able to write-off the purchase of real estate including land, in full, in the year of purchase? Are there no limitations? Here are some more questions:

  • If the purchase of capital equipment causes a company to have a net operating loss, can the loss be carried backwards and forward like under current law?

  • Is the purchase of stock in another business considered to be a tax deductible capital investment under the 999-Plan? The purchase of stock would be treated as an asset and not as a deductible expense under current law, but would it be treated simply as a deductible expense under the Cain plan? He doesn’t say.

  • Will there even be such a thing as a balance sheet under the new 999-plan, or will businesses simply need to account for gross income, purchases from U.S. businesses, capital investments, imports and exports?

  • Under the 999-Plan, purchases from non-U.S. located businesses are discouraged. So does the term “purchases” include the purchase of capital equipment? If capital assets are purchased from overseas companies, will they be deductible because they are capital investments, or will they not be deductible due to the “purchases from other U.S. located businesses” clause? Again, it’s not clear.

Net exports are also excluded from the proposed 9% business tax. So it would follow that a U.S. based business, which sells more of its goods overseas than in the U.S., would be exempt from taxes. Thus businesses are encouraged to export their goods and services, which might be beneficial to large manufacturers or retailers, but not to small service based businesses which make up the bulk of the American economy. Does a U.S. company have to be based in the U.S., where it would employ American workers, in order to receive the exemption, or can it open an operation in Mexico, sell its goods there and escape the 9% tax? Cain doesn’t provide any details on the exemption for net exporters either.

“Empowerment Zones will offer deductions for the payroll of those employed in the zone”

Under the 999-Plan, labor intensive companies would not receive a deduction for wages, unless located in empowerment zones. With wages being the bulk of gross income for many service sector businesses, under Cain’s 999-Plan it is possible for a business to have zero or negative income, according to generally accepted accounting principles, and still owe taxes. Also, in spite of the proposed repeal of Social Security, Medicare, and (I guess) Federal Unemployment, since these taxes were previously deductible for income tax purposes, the full effect of their elimination is somewhat mitigated. In other words a business can breakeven, and still wind up having to borrow money at the end of the year in order to pay a tax bill. So will more businesses simply relocate to empowerment zones under Cain’s plan, or will some just get the short end of the stick while others receive a big fat special interest type government subsidy?

“That dog won’t hunt.” ~Herman Cain

Non-Deductible Business Expenses under the 999-Plan

  • Wages paid outside of empowerment zones
  • State and local taxes
  • Federal and State and Local Licenses
  • Purchases from foreign based companies
  • Mortgage Interest Expense?
  • Business Interest Expense?
  • Retirement Plan Contributions?
  • Health Insurance Premiums?

Example 1

The following small business corporation has a single-owner, is labor intensive, and is not located within an empowerment zone. As you can see, in the example below, the company has net income of -0- under current law, and net income of 8,088.50 under the 999-Plan. This is attributable to the elimination of payroll taxes which were also deductible for income tax purposes. The company has taxable income of -0- under current law, but would have taxable income of $128,318 under the 999-Plan. This is attributable to its deductions being limited to capital investments and purchases from other businesses, versus all ordinary and necessary expenses.

Thus, where Federal, State, and National Sales taxes are all -0- under current law, they would be $21,199.08 (11,548.62 + 7,999.08 + 1,951.38) under the 999-Plan. When the total business taxes are subtracted from net income, after-tax income is -0- under current law, but would be negative (-13,110.58) under the 999-Plan. So the owner will either need to borrow money to pay the taxes, or add money from personal accounts to shore up the company. Let’s hope that the 9% Individual Flat Tax leaves the owner with enough to cover the company’s shortfall.

9% Individual Flat Tax

“Gross income less charitable deductions”

Most of us know what the term “gross income” means, but what does it mean under the 999-Plan. If an individual has a sole proprietorship, will they be taxed on gross income and not be allowed to deduct ordinary and necessary business expenses? Will those who own rental properties pay a 9% tax on gross rental income without the benefit of deductions for mortgage interest, real estate taxes, insurance, repairs and depreciation? Will employees who incur substantial unreimbursed employee expenses be denied the benefit of deducting such costs?

  • Since there won’t be a deduction for state and local taxes, including real estate taxes, one will in effect pay a 9% tax on the amount of State taxes paid.

  • Since there will no longer be a deduction for mortgage interest, there won’t be any incentive to payoff an existing mortgage. Homeowners will in effect be paying a 9% tax on the amount of mortgage interest paid. Won’t this cause more families to simply abandon their houses for rentals? Will the plan push us from a private ownership to a public or corporate ownership society?

  • Since there is no deduction for the amount of national sales taxes paid, taxpayers will in effect pay a 9% tax on the 9% national sales tax as well.

  • Since there is no deduction for retirement plan contributions, taxpayers will pay a 9% tax on contributions and another 9% on the same money when the funds are withdrawn. If one currently owns a ROTH retirement plan will they receive an exclusion from the 9% tax when the funds are withdrawn?

  • Will life and disability insurance proceeds, which are currently exempt, be subject to the new tax?

  • Since the 9% Individual Flat Tax doesn’t distinguish between being married, single, widow, widower, or having one child or ten, what will our society look like after this plan is implemented? Will the population decline, as the cost of raising children is penalized? Will there be fewer marriages?

“Empowerment Zones will offer additional deductions for those living and/or working in the zone”

In other words, it’s not a flat tax after all; it’s a flat tax with exceptions for certain special interest groups. If businesses and citizens race to occupy today’s empowerment zones, will they eventually cease to be empowerment zones? And if no one takes the bait, and the masses instead flee from empowerment zones, what then? Will the government start issuing refundable tax credits, like is does today? Will the plan then become known as the +9, -9, +9, +9 Plan? That’s a 9% flat business tax, a 9% refundable tax credit, a 9% flat individual tax, and a 9% national sales tax.

Example 2

In the example below, individual income taxes are calculated on the owner of the small business corporation in Example 1. The owner is married with two dependents and the only income is wages paid by the company. The taxpayer pays mortgage interest, real estate taxes, state income taxes, and makes charitable contributions as shown in the table below. Under current law, taxable income is $59,355 versus $94,500 under the 999-Plan. That’s because the only item deductible for tax purposes under the 999-Plan is charitable contributions. Thus Federal income tax under current law would be $6,053.10 (8,053.10 minus a child tax credit of 2,000), and $8,505 with the 999-Plan. Although the taxpayer saves $8,032.50 under the 999-Plan by not having to pay Social Security and Medicare taxes, State income taxes would be higher, unless all states with an income tax rewrite their revenue codes, simultaneously.

Thus, after-tax income would be $60,446.65 under current law, and $64,270.00 under the 999-Plan, but that’s before paying the 9% national sales tax. If we subtract out 15% of after-tax income as savings and principal repayments on loans, that leaves the taxpayer with disposable income of $51,379.65 under current law, and $54,629.50 under the 999-Plan. Disposable income is the amount that a taxpayer will spend on items subject to the 9% national sales tax. After allowing for the national sales tax of $5,784.30, the taxpayer will wind up paying $1,960.95 more in taxes under the 999-Plan than under current law. So unfortunately, this small business taxpayer will not save enough on personal taxes under the 999-Plan to compensate for the businesses shortfall of $13,110.58. But how many people own small businesses anyway? More than you can imagine. Does it get better for companies with more than one employee? No. It would only get better if the business and its owner relocated to an empowerment zone.

9% National Sales Tax

“Unlike a state sales tax, which is an add-on tax that increases the price of goods and services, this is a replacement tax. It replaces taxes that are already embedded in selling prices. By replacing higher marginal rates in the production process with lower marginal rates, marginal production costs actually decline, which will lead to prices being the same or lower, not higher.”

Once again, volumes could be written to define this overly simplistic statement. Cain has stated publicly that the national sales tax will be levied on the purchase of new houses, cars and other goods, but not on used items. When we were discussing this, someone in my office fired off, “So should I just start buying my clothes from Goodwill?” Why would anyone want to buy a new house if it will cost 9% more? A new $200,000 home would cost $218,000 under Cain’s plan. On face value, that doesn’t mesh with prices “being the same or lower” to me. This means that where a 10% down payment is required, that instead of looking at $20,000, a buyer will now have to come up with $21,800. And since the interest expense will no longer be deductible, what’s the point anyway? One wonders if there will even be any homebuilders left if this plan were to somehow pass.

A brand new $40,000 vehicle would cost $43,600 under Cain’s law, and that’s not including state and local tax, tag, and title. Most Americans can’t afford the former, so why would the latter be an improvement? So even if underlying prices remain the same under the 999-Plan, prices will, at the minimum, rise by 9%. The 999-Plan would only lead to an increase in used car sales, and a decline in automobile production.

Marginal production costs might decline for businesses that are not labor intensive, make all their purchases from U.S. suppliers, or are located in empowermnet zones; but what about labor intensive businesses, those dependent on foreign suppliers, and those located outside of empowerment zones? Under the 999-Plan, it is possible for a business to have a net loss and still owe taxes. As shown in Example 1, if a business spends 70% of its gross income on wages, and the rest on tax deductible expenses, even though it has no profit, it would still owe a 9% tax on the amount of wages paid. Thus where a business would have owed no taxes under present law, it may owe under the 999-Plan, which will drive up, not lower its production costs.

Eliminates double taxation of dividends –

If I heard Cain correctly, corporations would be able to deduct the amount of dividends paid, before computing taxes, so that dividends are only taxed once at the individual level. That’s a good thing, but if the current tax code is simply “thrown out”, and the IRS is shut down, what’s to prevent corporate officer’s from taking all, or most, of their compensation in the form of dividends instead of wages? Since wages won’t be deductible at the corporate level and dividends will, you can bank on this loophole being blown wide open.

Features zero tax on capital gains and repatriated profits –

No tax on capital gains? That reminds me of that old Better Business Bureau film entitled, “Too good to be true.” Yeah, if it sounds too good to be true, it probably is. Just like with dividends, if there is no longer an IRS, and if the current tax code is “thrown out”, what’s to prevent corporate officers and employees from being paid in stock, rather than wages, and then cashing in on tax-free capital gains later?

Also, since charitable contributions are the only deduction allowed under the 9% Individual Flat Tax, what happens with capital losses? Will capital losses be deductible against ordinary income, only against capital gains, or not deductible at all? He doesn’t say. So when Cain “throws out” the current tax code, and shuts down the IRS, who will write the new code? Will there be some kind of 999 Super Committee, charged with coming up with new tax theories, while barred from referencing the previous code?

Not taxing repatriated profits sounds good, but it also provides an incentive for companies to relocate overseas. So it’s either Mexico, or an empowerment zone, eh? Flip a coin. Although some have advocated for such a measure in lieu of another stimulus, no one was saying that it should be a permanent pillar of U.S. tax policy. Cain has merely picked up on a popular topic and wrapped it into what I would call basically a sham.

“Let’s get real.” ~Herman Cain

Okay, let’s get real. Cain is light on specifics, so one is resigned more to asking questions than analyzing data. It all sounds good on television, but the plan appears to be constructed mainly out of neat little sound bites designed to appeal to weak-kneed conservatives, rather than out of substance. Yes I am an accountant, and I am for simplifying the tax code, but I can’t go along with a plan that lacks common sense. In my opinion, we shouldn’t throw out our current tax code in favor of a poorly constructed plan, instigated by someone who knows nothing about income taxes. Herman Cain may know how to turnaround a pizza parlor, and he was a great local talk show host, but an accountant or economist he’s not.

Anyone serious about simplifying the tax code should be talking about the following:

  1. Eliminating accelerated depreciation
  2. Eliminating general business tax credits
  3. Eliminating personal tax credits
  4. Eliminating the alternative minimum tax
  5. Lowering marginal income tax rates

That would be a good start. If you don’t think that eliminating the above and lowering tax rates would greatly simplify the income tax code, then you don’t know anything about income taxes.

If the 999-Plan were to somehow miraculously survive a left-wing insurrection, how would the 43 States that have an income tax calculate their taxes? Since most of the States begin with federal adjusted gross income and allow federal itemized deductions, and since under the 999-Plan federal adjusted gross income is simply gross income, and itemized deductions are limited to charitable contributions, then won’t all States have to rewrite their tax codes as well? States will have to decide whether they want to allow deductions for mortgage interest, property taxes, and other expenses which are currently deductible, and if they don’t, then the burden of State taxes will rise, further diminishing the effect of the 999-Plan.

Finally, since the 999-Plan interferes with or supplants other federal laws, it will necessitate repeal of the Federal Insurance Contributions Act, and involve drastic changes to how Social Security and Medicare benefits are calculated. Will Social Security benefits be based on gross income, whether earned or unearned? Will future benefits simply come out of the general fund? If so, then will paying social insurance benefits out of the general fund put a strain on the rest of the federal budget, leading to tax hikes in the future? Will the Federal Unemployment Act also be repealed, since it is part of the payroll taxes employers pay?

There’s more to 9-9-9 than 9-9-9. As far as I’m concerned, the 999-Plan is a total sham, and because Herman Cain has staked his entire campaign on it, he’s not fit to be President of the United States. What America lacks is leadership. Offering to lead the nation down an unproven, untested, and unsound path is no different than what we have today. What most of us want to hear from prospective presidential candidates is what will replace Obamacare, which regulations will be repealed, how the size of government will be reduced, and how the federal budget will be balanced. Herman Cain’s 999-Plan is nothing more than a diversion, designed to win a primary and lose an election. If you want four more years of Obama, then vote for Cain.

“WHEN THE FOLLOWERS ARE READY, THE LEADER WILL APPEAR.”

References:

http://www.hermancain.com/docs/999-for-web-10-12.pdf

Related:

Obamacare’s Deadweight Loss

Obamacare’s Effect on Small Business

Obama’s Economic Reduction Plan

Why Congress Shouldn’t Just Pass Obama’s Jobs Bill, Again

Wednesday, October 12, 2011

Obamacare’s Deadweight Loss

Why you should repeal it right away! -

By: Larry Walker, Jr.-

“The most important single central fact about a free market is that no exchange takes place unless both parties benefit.” ~Milton Friedman -

Failure to repeal Obamacare by January of 2013 will result in deadweight losses in the American economy. Although static revenue believers contend that the federal government will be able to line its pockets through a new source of revenue, inefficiency will occur in the private sector causing the loss of existing and future jobs, a decline in income tax revenues, less private sector health insurance coverage, and fewer business expansions. In fact, many small businesses will be left with lower revenues, after paying the so called shared responsibility penalty, causing them to either price themselves out of the market, downsize, or shutter, depending on market conditions.

What is Deadweight Loss? – It’s an economic term which represents the costs to society created by market inefficiency. Deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources. Price ceilings (such as price controls and rent controls), price floors (such as minimum wage and living wage laws) and taxation are all said to create deadweight losses. Deadweight loss occurs when supply and demand are not in equilibrium. To see how deadweight loss occurs with Obamacare, let’s use an expanded real world example.

TEA, Inc. is a small Georgia based parts assembly plant with 50 full-time employees, not including its single owner. The company doesn’t provide health insurance for its employees due to a low profit margin, as doing so would impair its ability to continue as a going concern. However, the owner wants to expand in order to increase profits through horizontal integration. The company’s pre-tax net profit is projected to be $150,000 for each plant it operates, and each plant is expected to employ 50 full-time employees. Prior to the passage of Obamacare, TEA Inc.’s owner had planned on opening a second plant in 2012 and a third in 2013 creating an additional 100 jobs, but this misguided legislation has pretty much killed that dream. How’s that?

Well, since TEA, Inc. already has 50 full-time employees, it will be required by Obamacare to either provide and pay for at least half the cost of health insurance for its employees in 2014, or pay a penalty of $2,000 on each (excluding the first 30). In analyzing the financial impact, TEA, Inc. determines that 25 of its employees will require family plans, and 25 will require self-only plans. TEA, Inc. expects the ratio of family versus self-only plans to remain about the same as it expands. In examining the average cost of small group premiums within the Georgia market, it is known that self-only plans cost an average of $4,612, and family plans cost $10,598 (see Obamacare’s Effect on Small Business).

Single Plant Option

Prior to Obamacare, with its one existing plant, TEA, Inc. would have net income of $150,000, would pay federal income taxes of $41,750, and would be left with after-tax income of $108,250 (see table below). Assuming all things are equal, by 2014 when TEA, Inc. is mandated to provide health insurance at its existing plant, its health care expense will be $190,125 leaving it with a $(40,125) net operating loss, and no federal income tax liability. Since this is out of the question TEA, Inc. will be forced to either reduce its number of full-time employees to below 50, or pay a shared responsibility penalty (i.e. Health Care Tax).

Since TEA, Inc. cannot afford to comply with the play portion of the “play or pay rules”, if it does not reduce its workforce before 01/01/2013, then by 2014 it will be forced to pay a shared responsibility penalty of $40,000 ($2,000 per person on 20 of its 50 employees). Since the shared responsibility penalty is not deductible for tax purposes, TEA, Inc. will still have taxable income of $150,000, will pay federal income taxes of $41,750, and will have after-tax income of $108,250. However, after paying the shared responsibility penalty, the company will be left with just $68,250 or $40,000 less than it would have had before Obamacare (see table below). What will TEA, Inc. do? Its owner only has 14 months to decide, because the penalty will apply in 2014 if TEA, Inc. still has 50 or more full-time employees in the year 2013 (see Obamacare’s Effect on Small Business).

Options: If TEA, Inc. reduces its current workforce by one full-time equivalent employee, it can avoid paying the $40,000 penalty in 2014, but it must eliminate that position before the end of 2012, due to the twelve month look-back rule contained in Obamacare’s fine print. By doing so, TEA, Inc. will save the amount of one employee’s wages, less the increase in applicable federal taxes, and will avoid paying the $40,000 shared responsibility penalty, making the company better off. Unfortunately, this might be the best option available under the circumstances. So far, the deadweight loss is one full-time job.

Two Plant Option

If TEA, Inc. opts to push ahead and open the second plant, prior to Obamacare it would have net income of $300,000, would pay federal income taxes of $100,250, and would be left with after-tax income of $199,750. Assuming all things are equal, in 2014 when TEA, Inc. is mandated to provide health insurance at its old and new plant, its health care expense will be $380,250 leaving it with a net operating loss of $(80,250), and no federal income tax liability (see table below). Since this is out of the question TEA, Inc. will be forced to either forgo its expansion plans and not provide the additional 50 jobs, or pay the shared responsibility penalty (i.e. Health Care Tax).

Since TEA, Inc. cannot afford to comply with the play part of the “play or pay rules”, if it proceeds with the expansion, then by 2014 it will be forced to pay a shared responsibility penalty of $140,000 ($2,000 per person on 70 of its 100 employees). Since the shared responsibility penalty is not deductible for tax purposes, TEA, Inc. will still have taxable income of $300,000, will pay federal income taxes of $100,250, and will have after-tax income of $199,750. However, after paying the penalty, the company will be left with just $59,750 or $140,000 less than it would have had before Obamacare (see table below).

It’s worth noting that even after doubling its profits, TEA, Inc. would be left with less money -- $59,750, than it would have had with just the one plant -- $68,250. Again, what will TEA, Inc. do? Its owner only has 14 months to decide, because the penalty will apply in 2014 if TEA, Inc. has 50 or more full-time employees in the year 2013 (see Obamacare’s Effect on Small Business). The best option appears to be to not open the second plant, and to reduce the number of full-time employees at the initial plant by one. Thus, the deadweight loss has increased to 51 full-time jobs.

Three Plant Option

If TEA, Inc. decides to trust in “hope and change” and moves ahead with adding yet a third plant, pre-Obamacare it would have net income of $450,000, would pay federal income taxes of $153,000, and would be left with after-tax income of $297,000 (see table below). Assuming all things are equal, in 2014 as TEA, Inc. is mandated to provide health insurance at all three plants, its health care expense will be $570,375 leaving it with a $(120,375) net operating loss, and no federal income tax liability. Since this is impossible, TEA, Inc. will be forced to either forgo its expansion plans and not provide the additional 100 jobs, or pay the shared responsibility penalty (i.e. Health Care Tax).

Since TEA, Inc. cannot afford to comply with the play aspect of the “play or pay rules”, if it proceeds with its expansion plans, then by 2014 it will be forced to pay a shared responsibility penalty of $240,000 ($2,000 per person on 120 of its 150 employees). Since the shared responsibility penalty is not deductible for tax purposes, TEA, Inc. will still have taxable income of $450,000, will pay income taxes of $153,000, and will have after-tax income of $297,000. However, after paying the shared responsibility penalty, the company will be left with just $57,000 (see table below).

It’s notable that even after tripling in size, TEA, Inc. would be left with less money –- $57,000, than it would have had with just two plants –- $59,750, and even less than it would have had with just the one plant –- $68,250. Again, what will TEA, Inc. do? Its owner only has 14 months to decide, because the penalty will apply in 2014 if TEA, Inc. has 50 or more full-time employees in the year 2013 (see Obamacare’s Effect on Small Business).

The best option for TEA, Inc. appears to be to forget about opening a second and third plant, and to reduce the number of employees at its existing plant. By doing so, TEA, Inc. will be able to maintain its present after-tax net income of $108,250, plus the savings achieved by eliminating a job, which yields the optimal result. Thus, in this real-life scenario, the deadweight loss created by Obamacare is 101 full-time jobs. In addition, 49 full-time employees are left without health insurance, and by 2014 will be forced to either pay a tax or secure their own health insurance coverage. Failure to repeal Obamacare means that this entrepreneur’s dreams of expansion will be destroyed, and 101 potential employees will be left on the sidelines. Obamacare will impose unnecessary deadweight losses upon the American economy, which will be multiplied many times over.

Forcing the free-market to accept and live with market inefficiency just doesn’t work out so well in a free market society. Any so called Jobs Bill which doesn’t immediately repeal this irresponsibly enacted, job killing, legislation isn’t a jobs bill at all. In my humble opinion, the Patient Protection and Affordable Care Act (PPACA) should be repealed right away. You should repeal it, right now! Be sure to sign the White House Petition to Repeal Obamacare. You must sign by 10/22/11. “Live free or die.”

Related: Obamacare’s Effect on Small Business

Thursday, October 6, 2011

Obamacare’s Effect on Small Business

Unaffordable Care Act | Jobless, Unshared, and Irresponsible -

By: Larry Walker, Jr. -

“An unlimited power to tax involves, necessarily, a power to destroy; because there is a limit beyond which no institution and no property can bear taxation.” ~ Daniel Webster in M'CULLOCH v. STATE, 17 U.S. 316 (1819) -

Although Barack Obama boasts of having implemented 17 tax cuts for small business during his one-term proposition, as I pointed out in Why Congress Shouldn’t Just Pass Obama’s Jobs Bill, Again, not one item on the list actually meets the definition of a tax cut. #1 on the list was the Small Employer Health Insurance Tax Credit, which is found in Internal Revenue Code Section 45R. The goals of the Section 45R credit are supposedly as follows: (1) to help offset the cost to small businesses that offer employee health insurance coverage, and (2) to encourage small businesses not providing health insurance to start offering coverage.

But unfortunately, the overall effect of the Patient Protection and Affordable Care Act, will be to encourage large employers, those with 50 or more full-time employees, to drop health insurance coverage, reduce the number of employees, or cut weekly work hours to less than 30 in order to avoid paying the so-called shared responsibility penalty. Neither will the new legislation encourage smaller companies, those with fewer than 50 full-time employees, to offer health insurance, as it merely provides a six-year subsidy for those with fewer than 25 employees, encouraging them to limit their growth to 24 or fewer full-time employees, and it does absolutely nothing for companies with between 25 and 49 full-time equivalent employees.

Code Section 45R – Small Employer Health Insurance Tax Credit

The tax credit is available from 2010 through 2015. For 2010 – 2013 the maximum credit is 35% of qualified premium costs paid by for-profit companies, and 25% for non-profits. The maximum credit is only available to employers with no more than 10 full-time equivalent employees (FTE’s), who are paid average annual wages of $25,000 or less. A reduced credit is available on a phase-out basis for employers with between 10 and 25 FTE’s, who are paid average wages of $25,000 to $50,000. In effect, the credit is reduced by 6.667% for each FTE in excess of 10, and by 4% for each $1,000 in average annual wages paid above $25,000. For example, an employer with 13 full-time equivalent employees who are paid average annual wages of $45,000 will not receive a tax credit. No tax credit is available for employers with 25 or more FTE’s, or who pay average annual wages of $50,000 or more.

From Unaffordable Care Act

In 2014 through 2015, the credit increases to 50% of the amount of qualified premium costs paid by for-profits, and 35% for non-profits, however by then, the employer must participate in a state insurance exchange in order to obtain the credit. [Note: Each state is required to create an insurance exchange by January 1, 2014 which must include an American Health Benefit Exchange, as well as a Small Business Health Options Program (SHOP) Exchange.]

Full-Time Equivalent Employees (FTE’s) – For purposes of the Code Section 45R Credit, the number of FTE’s is determined by dividing the total number of hours worked by each employee (but not more than 2,080 per employee) by 2,080. This is based on a 40 hour work-week for all 52 weeks of a calendar year. The result is rounded down to the nearest whole number. An employer with 25 or more employees may still qualify for the credit if it employs part-time or seasonal workers. Seasonal workers are disregarded in determining the number of FTE’s as long as they work for less than 120 days during the tax year, however the amount of health insurance premiums paid on their behalf is still counted in determining the amount of the Section 45R credit. The number of FTE’s is calculated by totaling all hours worked by each full-time employee, each part-time employee, and each seasonal employee (working more than 120 days) and then dividing the total hours worked by 2,080.

Example: TEA Corporation has 7 employees who worked 2,000 hours each, and 5 who worked 1,500 hours each, during the tax year. The number of FTE’s is calculated by totaling all the hours worked, and dividing the result by 2,080. In this case, TEA Corporation has 10 full-time equivalent employees.

Average Annual Wages – Average annual wages is calculated by dividing the total amount of wages paid for the year by the number of FTE’s. However, certain employees are excluded from both the FTE and average annual wage calculations as follows: sole proprietors, partners in partnerships, greater than 2% owners of S-Corporations, greater than 5% owners of C-Corporations or other entities, and most family members (including children, step-children, siblings, step-siblings, parents, step-parents, nieces or nephews, aunts or uncles, and in-laws).

Example: TEA Corporation paid total annual wages of $250,000, not including the wages paid to its owner. Since TEA Corporation has 10 FTE’s, its average annual wages are $25,000 ($250,000 / 10).

Premiums – Only health insurance premiums paid by the employer under a qualifying arrangement are counted in calculating the Code Section 45R tax credit. For 2010, employers were allowed to count the total amount of premiums paid for the entire year, even though the health reform plan wasn’t passed until March 23, 2010. However, in order to qualify, the employer must pay at least 50% of the total premium costs. Employers are only allowed to count the amount the company pays and not the amounts paid by employees. Health insurance coverage also includes amounts employers pay for dental, vision, long-term care, nursing home care, home health care, community based care or any combination thereof.

The amount of an employer’s premium payments that counts is capped by the amount of average premiums for the small group market in the state (or an area within a state) in which the employer offers coverage. The average premium for the small group market in a state or area is determined by the Department of Health and Human Services (HHS). The IRS released the average premium for the small group market in each state for 2010 in Revenue Rule 2010-13 (table at left-hand). For example, in 2010, the limits in Georgia were $4,612 for self-only coverage, and $10,598 for family coverage.

Carry Back and Carry Forward – The Section 45R credit is not refundable to for-profit companies. Any unused portion may be carried back 1 year and carried forward for 20 years, however a credit earned in 2010 may only be carried forward. Note: Companies with no tax liability will not receive any immediate assistance from the Section 45R credit. So for example, a company taking advantage of the 100% bonus depreciation provision, or other tax benefits, and the Section 45R credit in the same year may not gain any immediate benefit from the health care credit.

Health Insurance Deduction and Tax Credit – Under Internal Revenue Code Section 162, long before health care reform, employers have generally been allowed to deduct the cost of providing health insurance coverage for employees. However, going forward the IRS has interpreted that the amount that may be deducted must now be reduced by the amount of any Code Section 45R credit.

Example: A Georgia Based Small Business

TEA Corporation is a Georgia based company with a single owner and 10 full-time equivalent employees, average annual wages of $25,000 per year, and it provides self-only health insurance coverage. TEA Corporation pays 50% of the total premium for each employee. These figures were chosen specifically; since in order to qualify for the maximum Section 45R credit an employer can have no more than 10 FTE’s, average wages of no more than $25,000, and must pay at least 50% of its employee’s insurance premiums.

Because the total amount of premiums cannot exceed $4,612 for self-only coverage within the State of Georgia, the total amount of premiums paid by TEA Corporation, for purposes of the tax credit, is limited to be $23,060 (2,306 X 10). Assuming the company is in a 34% income tax bracket (i.e. taxable income is between $75,000 and $100,000 per the table below); the Section 162 deduction would normally save the company $7,840 (23,060 X 34%) in taxes.

Now, since the company qualifies for the maximum Section 45R credit of 35%, it will receive a tax credit of $8,071 (23,060 X 35%), however it will only be allowed to deduct health insurance expenses under Section 162 of $14,989 (23,060 – 8,071). So the Section 162 deduction of $14,989 saves the company $5,096 (14,989 X 34%), in addition to the Section 45R credit of $8,071, for total tax savings of $13,167 (5,096 + 8,071). So in effect, the new tax credit benefits the company by an additional $5,327 (13,167 – 7,840), or by $532 per employee, because the company would have already saved $7,840 (23,060 X 34%) prior to Obamacare.

From Unaffordable Care Act

If in the example above, TEA Corporation was not able to afford health insurance prior to Obamacare, then how does the Section 45R credit change things? Won’t the company still have to shell out an additional $23,060 to cover the employer’s share of health insurance costs? Yes. And although it will be eligible for the Section 45R credit, it won’t realize the $13,167 in tax savings until its tax return is filed in the subsequent year. So in effect, the company’s cost per employee will have risen by $2,306. Adding to the dilemma is the fact that the amount each employee must contribute also increases by $2,306. So both the company and its employees will be poorer at the end of the year, although the employer may have a chance to recoup about 57% (13,167 / 23,060) of its costs through subsequent year tax savings, and its employees will receive health insurance.

Problems: (1) In tax years 2010 through 2013, the federal government is going to somehow magically come up with $13,167 to cover 57% of TEA Corporation’s health insurance premiums, and do the same for potentially thousands of other similar small businesses, but who’s going to pay for this? Won’t the tab simply be added to the seemingly unlimited national debt balance? (2) And since employees will have to pay for potentially half of their own health insurance costs, each one who wasn’t previously covered by health insurance, and more specifically those making less than $25,000 per year, will have to figure out how to live off of approximately $2,306 less in disposable income. Does this sound like a good deal for those making under $25,000 per year, or even $50,000?

More Problems: (1) Of course, if any of the 10 employees in this example require family coverage, the costs for both the employer and employee will go up dramatically, as will the government’s cost of the subsidized tax credit. In the example above, the employer and employee obligation rises from $2,306 to $5,299 per year, or half of the average premium for small group family plans of $10,598. (2) Then in 2014 and 2015, as the Section 45R Credit increases to a maximum of 50%, the federal government’s (i.e. taxpayers) share increases by even more. This additional federal spending, though tax expenditures, will only add to the federal government’s current national debt balance of $14.7 trillion and ticking, until the tax credit well runs dry in 2016. (3) If small companies can't afford it now, how will those who employ fewer than 25 workers be able to afford health insurance after 2015?

Exempt Organizations – Meanwhile, tax-exempt organizations will receive a “refundable tax credit” of up to 25% of the amount of health insurance premiums paid between 2010 and 2013, and 35% in 2014 and 2015. This refundable tax credit is limited to the amount of federal tax withheld from employees’ paychecks, the amount of Medicare tax withheld from employees, and the amount of Medicare tax matched by the employer.

Problem: Since exempt organizations don’t pay income taxes, the cost of the refundable Section 45R tax credit will never be recovered. In effect, individual and for-profit business taxpayers are subsidizing the tax credits granted to small non-profit organizations. Non-profit organizations, which are not even subject to the income tax, are being allowed to receive refundable income tax credits based on the amount of payroll taxes paid essentially by their employees. So in this respect, all Obamacare does is to giveaway more tax expenditures to folks who don’t pay any federal income tax. Wasn’t this already a major problem prior to Obamacare?

Large Employers – “Play or Pay”

Although Obamacare doesn’t mandate small employers to offer health insurance coverage to their employees, it does include play or pay rules which apply after 2013. The provision is intended to encourage employers to offer coverage or to pay a shared responsibility penalty. The play or pay rules only apply to large employers, those with 50 or more full-time employees. [Note: Employers who offer free choice vouchers to qualified employees were supposed to have been exempt from the penalty, but this provision was repealed in 2011.]

Problem: Employers who employ 25 or fewer employees are given an incentive to begin or to continue health insurance coverage, but are not required to provide it; while those with 25 to 49 employees are given no incentive, and are not required to provide insurance; and those with 50 or more employees are given no incentive, but face penalties for not offering adequate and affordable coverage by 2014.

Shared Responsibility Penalty The shared responsibility penalty will apply to two groups of employers after 2013: (1) Large employers that do not offer health insurance coverage. (2) Large employers that offer coverage but have one or more employees receiving premium assistance tax credits or cost-sharing because the coverage is deemed unaffordable. If even one employee receives premium assistance tax credits through a state insurance exchange, then the penalty will be $2,000 per full-time employee (not including the first 30 workers). And if the employer offers what is deemed to be unaffordable coverage, then the penalty will be $3,000 for any employee who receives premium assistance tax credits through a state insurance exchange up to a cap of $2,000 for every full-time employee.

[Note: Unaffordable coverage is defined as when the premium required to be paid by the employee is more than 9.5% of the employees’ household income. In such cases the employee is eligible for a premium assistance tax credit and cost-sharing reductions, but only if the employee declines to enroll in the employer’s coverage and purchases coverage through a state insurance exchange.]

Large Employer Problems:

(1) Large employers need to know how much household income each employee has including all working adults within their households.

(2) For purposes of the shared responsibility penalty, a Large Employer is an employer which employed an average of at least 50 full-time employees during the preceding calendar year. In other words, those with an average of 50 or more full-time equivalent employees in 2013 will be subject to the penalty in 2014, even if they have reduced the number of employees by that time.

(3) Full-Time Equivalent Employees for Large Employers - Unlike the definition of full-time equivalent employee for small employers, for purposes of the shared responsibility penalty, a full-time employee is defined as one who works an average of 30 hours per week. Employers who think they won’t be affected by the penalty or the employer mandate need to read the fine print.

Conclusions

  1. By offering incentives to micro-sized businesses, those with 25 or fewer full-time employees with average wages of less than $50,000, and no incentives to larger companies, Obamacare discriminates against job creators.

  2. Since employers with fewer than 25 employees are not required to provide health insurance coverage, and are not penalized for not providing coverage, most employers who qualify for the tax credit are not taking the bait. Let’s face it, health insurance plans drive up business costs even with a generous tax credit. And since the tax credit expires at the end of 2015, what is the catalyst which will make health insurance more affordable in the future? Will businesses and their customers have more money in their pockets as a result of Obamacare?

  3. Employers with more than 25 full-time employees and fewer than 50 fall between the cracks. For them, there is no incentive to provide health insurance coverage and no penalty for failing to provide it. It’s as if they don’t exist, which clearly displays the discriminatory aspect which Obamacare casts upon job creators.

  4. Meanwhile, large employers, those with 50 or more employees working at least 30 hours per week, receive no incentive to provide coverage, yet will be punished for not providing it. In the end, some large employers are encouraged to reduce the number of full-time equivalent employees to below 50 before 2013, to reduce the number of hours worked for some employees to below 30 per week, or to simply pay the shared responsibility penalty of $2,000 on each employee (excluding the first 30), rather than commit to even more costly health insurance contracts.

If TEA Corporation, in the example above, had 100 employees requiring self-only coverage, and paid 50% of the premiums, then its health insurance expense would be roughly $230,600. However, if TEA Corporation simply opted to pay the shared responsibility penalty of $2,000, on the 70 applicable employees, it would have to pay the IRS a penalty of just $140,000, in lieu of the $230,600 cost of insurance. But, if TEA Corporation is not able to afford $230,600, to pay for health insurance on its employees, it is compelled by the rule of law to hand over $140,000, money that it may or may not have, to the federal government under the play or pay rules. Is this fair?

The way things stand today, if by the year 2014 a large employer can’t afford health insurance, in spite of Obamacare - which does nothing to make it more affordable, or if providing health insurance would jeopardize its ability to continue as a going concern - in the Obama economy, then it still must pay the shared responsibility penalty, even if it means laying off workers, shuttering operations, or filing for bankruptcy. In other words, America’s job creators will either play, pay or be destroyed. If this job killing law is not repealed by 12/31/2012, the unemployment rate will continue to soar, because the companies which will be most affected are compelled to take action before then. In fact, in order to ensure that they are not blindsided by the one year look-back rule which begins on 01/01/2013, many companies are already taking action.

In my humble opinion, the Patient Protection and Affordable Care Act cannot be repealed fast enough. Be sure to sign the White House Petition to Repeal Obamacare. You must cast your Vote by 10/22/11.

Related:

Final: Obamacare | The Macro View

Why Congress Shouldn’t Just Pass Obama’s Jobs Bill, Again