The Justice Department is prepared to defend the new federal insurance mandate as an exercise of Congress’s “power to lay and collect taxes”.  You might remember that when the White House was pushing the new health care legislative they insisted that the bill’s passage would not create a tax increase.  The truth is the mandate is not a tax – and if it were, it would be unconstitutional.

A tax is when the government takes money from you, puts it in the Treasury with plans  to spend it (usually before they  get it).   The mandate requires  you to give your money to another private entity – not the Treasury – and if you don’t obey the mandate, you must pay a penalty to the Treasury – penalties are not taxes.   The mandate is legally separate from the penalty.   AND, even if the Justice Department were to get the mandate considered a tax – it would be an unconstitutional tax. 

Under the 10th Amendment, the government only has those powers enumerated by the Constitution.  Every federal action must be authorized by a Constitutional provision.  IF THERE IS NO PROVISION, THE ACTION IS UNCONSTITUTIONAL.   And, the last time I read the Constitution, there was no provision authorizing the government to command anyone to buy health insurance.

While Article l of the Constitution gives the federal government broad power to tax, that power was originally  limited to three (3) types of taxes:  DUTY (an  indirect tax on imports), EXCISE (an  indirect tax for the privilege of doing something),  and lastly, DIRECT.  The only type of direct tax authorized by the Constitution was a capitation tax (head tax) which everyone was required to pay.  And, that capitation tax was to be apportioned – meaning that every person in a given state had to pay the same amount.  

When Income Tax was created in the late 1800’s, the Supreme Court struck it down  on the grounds that it was a direct tax but not apportioned.  Which brings us to the 16 Amendment  that  instituted a national income tax.  Since 1913, income tax became the fourth type of tax the government could impose. 

THE HEALTH INSURANCE MANDATE FITS INTO NONE OF THESE 4 CATEGORIES AND IS THEREFORE NOT CONSTITUTIONALLY JUSTIFIED AS A TAX. 

In 6 months, the largest tax hike in the history of American will take effect. They will hit families and small busineses in 3 tidal waves on Janurary 1, 2011.

First Wave: Expiration of 2001 and 2003 Tax Relief

In 2001 and 2003, the GOP Congress enacted several tax cuts for investors, small business owners, and families. These will all expire on January 1, 2011:

Personal income tax rates will rise. The top income tax rate will rise from 35 to 39.6 percent (this is also the rate at which two-thirds of small business profits are taxed). The lowest rate will rise from 10 to 15 percent. All the rates in between will also rise. Itemized deductions and personal exemptions will again phase out, which has the same mathematical effect as higher marginal tax rates. The full list of marginal rate hikes is below:

- The 10% bracket rises to an expanded 15%
- The 25% bracket rises to 28%
- The 28% bracket rises to 31%
- The 33% bracket rises to 36%
- The 35% bracket rises to 39.6%

Higher taxes on marriage and family. The “marriage penalty” (narrower tax brackets for married couples) will return from the first dollar of income. The child tax credit will be cut in half from $1000 to $500 per child. The standard deduction will no longer be doubled for married couples relative to the single level. The dependent care and adoption tax credits will be cut.

The return of the Death Tax. This year, there is no death tax. For those dying on or after January 1, 2011, there is a 55 % top death tax rate on estates over $1 million. A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones.

Higher tax rates on savers and investors. The capital gains tax will rise from 15 percent this year to 20 percent in 2011. The dividends tax will rise from 15 percent this year to 39.6 percent in 2011. These rates will rise another 3.8 percent in 2013.

Second Wave: Obamacare

There are over twenty new or higher taxes in Obamacare. Several will first go into effect on January 1, 2011. They include:

The “Medicine Cabinet Tax” Thanks to Obamacare, Americans will no longer be able to use health savings account (HSA), flexible spending account (FSA), or health reimbursement (HRA) pre-tax dollars to purchase non-prescription, over-the-counter medicines (except insulin).

The “Special Needs Kids Tax” This provision of Obamacare imposes a cap on flexible spending accounts (FSAs) of $2500 (Currently, there is no federal government limit). There is one group of FSA owners for whom this new cap will be particularly cruel and onerous: parents of special needs children. There are thousands of families with special needs children in the United States, and many of them use FSAs to pay for special needs education. Tuition rates at one leading school that teaches special needs children in Washington, D.C. (National Child Research Center) can easily exceed $14,000 per year. Under tax rules, FSA dollars can be used to pay for this type of special needs education.

The HSA Withdrawal Tax Hike. This provision of Obamacare increases the additional tax on non-medical early withdrawals from an HSA from 10 to 20 percent, disadvantaging them relative to IRAs and other tax-advantaged accounts, which remain at 10 percent.

Third Wave: The Alternative Minimum Tax and Employer Tax Hikes

When Americans prepare to file their tax returns in January of 2011, they’ll be in for a nasty surprise—the AMT won’t be held harmless, and many tax relief provisions will have expired. The major items include:

The AMT will ensnare over 28 million families, up from 4 million last year. According to the left-leaning Tax Policy Center, Congress’ failure to index the AMT will lead to an explosion of AMT taxpaying families—rising from 4 million last year to 28.5 million. These families will have to calculate their tax burdens twice, and pay taxes at the higher level. The AMT was created in 1969 to ensnare a handful of taxpayers.

Small business expensing will be slashed and 50% expensing will disappear. Small businesses can normally expense (rather than slowly-deduct, or “depreciate”) equipment purchases up to $250,000. This will be cut all the way down to $25,000. Larger businesses can expense half of their purchases of equipment. In January of 2011, all of it will have to be “depreciated.”

Taxes will be raised on all types of businesses. There are literally scores of tax hikes on business that will take place. The biggest is the loss of the “research and experimentation tax credit,” but there are many, many others. Combining high marginal tax rates with the loss of this tax relief will cost jobs.

Tax Benefits for Education and Teaching Reduced. The deduction for tuition and fees will not be available. Tax credits for education will be limited. Teachers will no longer be able to deduct classroom expenses. Coverdell Education Savings Accounts will be cut. Employer-provided educational assistance is curtailed. The student loan interest deduction will be disallowed for hundreds of thousands of families.

Charitable Contributions from IRAs no longer allowed. Under current law, a retired person with an IRA can contribute up to $100,000 per year directly to a charity from their IRA. This contribution also counts toward an annual “required minimum distribution.” This ability will no longer be there.

The U.S. government’s fiscal gap is widening by the hour.  The 2009 deficit was  $1.4 trillion and, by the end of this year, the Office of Management and Budget says the gross federal debt will stand at $13.8 trillion.  Bruce Bartlett, a former Reagan economic advisor and supporter of VAT, puts it in terms everyone can understand – “the U.S. needs a money machine.”  They certainly would get it in a VAT.  The Congressional Research Service has estimated that each one percent of VAT would raise a (cool) $50 billion.     The Tax Foundation recently calculated that to balance the federal budget, VAT would have to be at least 18%. 

Because a VAT potentially taxes everything,  it would,  like all other tax laws, be riddled with exemptions.  Using the nanny approach, government could exempt so called “green” goods, certain foods they  think you should consume,  and  automobiles they feel you should drive.   It  could conceivably take years to implement and you know what that means – special interest lobbyists and Congress will carve it up  like a  Thanksgiving Turkey – everyone fighting for the choice meat to put on their plates for the next election.

Since VAT is a tax on the estimated market value it must be added to a product or to material at every stage of its manufacture or distribution.  Both VAT and a National Sales Tax are similar in that the end price would be identical.  The difference lies in the way the tax is levied and collected.  As a example, lets say VAT is set at 10%.  A farmer sells enough oranges to make one quart of  juice for .60 cents – VAT is  .06 cents.  The manufacturer’s cost to produce one quart of juice is $1.00 – VAT has now jumped to .16 cents.  The manufacturer sells the juice to a wholesaler who must add in his costs at .30 cents a quart – VAT hits  .19 cents.  From farmer to retailer, the total cost to bring the juice to market is $1.90 but, as the consumer, you would have to pay the VAT, making the actual purchase price $2.09, or a 10% increase out of your pocket.   Now, multiply that by every item you have in your basket.   Since the VAT is not listed on your sales receipt but is embedded in the price, Uncle Sam is hoping you won’t notice the extra tax you just paid.   This tax will be added to  every item you buy.

What they will neglect to tell you in their sales pitch is that  the accounting and paperwork associated with a VAT will inflate  the initial cost of everything you buy.   The fundamentals of supply and demand suggest that any tax will raise the cost to someone and in the case of VAT, to lots of someones.   The farmer must verify that he is actually selling his product to a manufacturer and issue a certificate of the value of his goods.  The manufacturer must determine that he is not selling his goods to an end seller and provide  a certificate showing the value of the purchase of raw materials plus the value of his cost to manufacturer to the wholesaler.   Then the wholesaler must follow suit when he sells to a retailer.  The retailer has the added burden of not only keeping track of all the paperwork associated with what he sells but filling out the endless paper trail for Uncle Sam when the VAT is paid.  While this may help the job market, it isn’t going to do much for your pocketbook.   That $2.09 orange juice just got a LOT more expensive.    And, it will continue to get even more expense as Uncle Sam slowly but surely increases that cash cow in small increments hoping you won’t notice another penny here and there. 

VAT was sold in Europe as a means to tax consumption with less economic harm than raising their income tax rates.  Unfortunately, it did little to protect their pocketbooks as income tax rates remain very high and VAT continues to grow.   

With the Bush tax breaks set to expire this year, we are already facing massive tax increases.  According to a Heritage Foundation fundraising letter I recently received, the overall tax increase faced by American families, seniors and businesss is $2.4 trillion.  The initial cost of the 18 new Obamacare tax increases, set to take effect next year,  alone  is  $503 billion.

Have you ever stopped to think about the indirect federal  taxes that you  pay in addition to income tax?   There are indirect taxes on gas, coal, diesel, airline tickets, fishing equipment, telephone service, cable, firearms, ammunition, tires, tobacco, alcohol, utilities, wireless, cell phones, ad nauseam.    Then you are hit with the State Income Taxes, Sales Taxes,  and State indirect taxes on utilities, landlines, wireless phone service, State E-911 wireless, public rights-of-way use fees on landline phones, relay center assessment tax on landline phones, gas, tobacco, alcohol, cable, satellite cable and radio,  ad nauseam.  And lets not forget the real estate tax, personal property tax and in some cases added sales tax in addition to the  indirect taxes you pay at the local level for 911, landline and wireless service, utilities, video programming on cable, cable,  ad nauseam.  WHERE DOES IT END?

“Money is time made tangible – the time invested in the earning of it.  Taxation is the confiscation of the earner’s time.  Although some taxation is necessary, all taxation diminshes freedom.  Adding a VAT without subtracting the income tax would constrict  Americans’ freedom much more than the health care legislation does.  Because the 16th will not be repealed, adoption of a VAT would proclaim the impossibility of serious spending reductions and hence would be the obituary for the Founders’ vision of limited government.”     George Will,  Washington Post