This Health-Care Reform Might Tax Us to Death

Just how bad IS the new proposed legislation on so-called health-care reform for investors? Well, how much time do you have?

Let's start with the price. This thing is going to cost trillions of dollars. And how do you think it's going to get paid for?

Investors are going to get taxed. You are going to get taxed. It's that simple. The people without health insurance -- the very people whom this is supposed to help -- are going to get taxed too. And millions of them will be left without insurance (even though they have to pay higher taxes).

First, to the investors. According to the bill passed this week by the House of Representatives, any individual who makes more than $280,000 a year -- or any couple that makes more than $350,000 -- is going to pay a surcharge of at least 1% of income above those levels. The more you make, the more you pay. The biggest earners will face a surcharge of 5.4%.

It will kick in for tax year 2011, which is when the 2003 tax cuts "sunset" away and revert to the previous higher levels. Put it together and you have a serious tax hike for the kind of people who do most of the investing in this country.

According to the nonpartisan Tax Policy Center, the top marginal federal-income tax rate will be 45%. If you take state taxes into account, it's off the charts. According to the nonpartisan Tax Foundation, if you include state income taxes, people in 39 out of 50 states will be above the 50% tax rate.

My home state, California, will boast a rate of 56.6%. Did you happen to notice that "for sale" sign out in front of my house? With taxes like that, I'm moving somewhere else, and I pretty much don't care where. (I hear taxes on the moon are especially low.)

Investors pay another way, too. Suppose you own stock in one of the health care companies that gets destroyed when government takes over? Don't think it won't happen. Since Barack Obama was inaugurated in January on a mandate of "change" -- including so-called health care "reform" -- the S&P 500 has returned 17.4%. But with the threat of "reform" hanging over it, the health care sector has only returned 4.8%. The difference -- 12.6% -- is a loss for investors.

People who can't afford to invest will pay, too. Under the House's bill, every American would be required to have health care insurance whether they want it or not. That's the way it is in socialist dictatorships -- anything not forbidden is mandatory. If you choose not to get insurance, you get hit with an "excise tax," which is a fancy way of saying a fine or a penalty. It's approximately 2.5% of your income.

The government will give you insurance for free if your income is less than four times the poverty line. But suppose you're a middle class working guy or gal -- you're not impoverished, but you need to save every penny. You're young and healthy, so you've decided to do without insurance. Sorry, you have to pay the excise tax. So you look around and figure out if you can get health care insurance -- which you don't even want -- for less than the amount of the excise tax. If you can't, then you pay the tax. And you're still not insured. Or if you decide you might as well buy the insurance anyway, you've still been "taxed" because you're spending money on something you don't want or need in a way that you didn't choose. There's good research that suggests that there are as many as eight million Americans who will be in this situation.

Insured or uninsured, well off enough to pay the surcharge or not, everyone is going to be hurt by this. Because when you raise taxes like this, you suck money out of the economy that could go into spending, saving and investing.

Second, you put government in charge of something that should be a matter of private initiative and personal choice.

And don't tell me that only government can step in and prevent runaway "health care inflation." There's no such thing. The average overall inflation rate has been 3.8% per year. For health care, it's been 5.5%. Higher but not exactly a "runaway" number that justifies the government seizing control of a sector that represents about 17% of gross domestic product. Why is "health care inflation" higher than overall inflation? For all we know, it could be because health care has so many amazing innovations -- drugs, tests and procedures that couldn't have even been imagined just a decade ago -- that it's impossible to track the "price." Or it could be because health care is already very highly regulated, subsidized and otherwise interfered with by government. If there is inflation there, maybe it's because the private sector hasn't been able to work its capitalist magic.

The banking sector is also regulated, subsidized and otherwise interfered with by government. And look where that got us. (Ever hear of the credit crisis?) Its historical inflation rate is higher than the overall inflation rate, too.

But look at food. Other than basic safety inspection, food production and distribution is hardly regulated at all. It’s more essential than health care. The private sector handles it all. Its historical inflation rate is lower than the overall rate, not higher.

To me, all this is so simple and so obvious; I just can't believe a nation of intelligent people will destroy itself this way. So I think it's worth a bet that we'll pull back from the brink and reject this particular bit of madness. I think it's possible that stocks have rallied this week precisely because this call for ruinous taxes is sure to be rejected, and when it is, it will put the high-tax genii back in his bottle for a long while.

So watch this one carefully. It's a test case. If this nearly criminal tax-and-don't-insure scheme is enacted into law, the nascent bull market is over. But if I'm right, and it gets rejected, then stocks could move a lot higher once they see that it's still possible for the government of this country to do the right thing every once in a while.