Opinion - Bad medicine for small business?

By Karen Kerrigan

chairman and founder

Small Business Survival Committee

WASHINGTON, D.C. -- Could the prescription drug entitlement being considered by Congress negatively impact small businesses? In reviewing the findings of various research studies, small businesses have every reason to be concerned.

Democrats are blaming President Bush for policies that are fiscally irresponsible at the same time he is urging spending restraint by the Congress. Yet, it was a bipartisan effort that helped advance a 10-year $400 billion Medicare prescription drug benefit through both houses of Congress. The House and Senate must now work out the differences in their legislative packages through a conference report.

Piling an expensive new entitlement on top of already fiscally challenged ones seems to defy logic. According to the Congressional Budget Office (CBO), entitlement spending consumes 60 percent of federal outlays, and will practically double as a share of gross domestic product (GDP) over the next 40 years.

Meanwhile, a timely Government Accounting Office (GAO) study released July 28 reminded policymakers about the pending crisis in Social Security. The GAO urged swift reform as the program starts to pay out more than it takes in by 2018.

The Heritage Foundation estimates the cost of the drug entitlement alone will exceed $2 trillion through 2030. That means a baby born today will pay $1,125 in extra taxes each year when he or she reaches age 27. Payroll taxes to fund Medicare and Social Security are, of course, extra.

Dr. Daniel J. Mitchell, senior research fellow of the Heritage Foundation, asserts that Medicare expansion threatens the 2001 and 2003 Bush tax relief packages and any hope for fundamental tax reform.

"Rather than enacting a huge new drug entitlement policy that will undermine sensible tax policies, lawmaker should pause to consider how best to address the shortcomings of Medicare in a responsible manner," recommends Daniels.

He fears that tax increases on the order needed to finance the big entitlement deficits of the future "would be a body blow to the economy, threatening European-style stagnation and higher unemployment."

Employers, the self-employed and workers have found themselves faced with higher taxes whenever Congress has responded to perpetually rising Medicare costs. A 2000 report by the Small Business Survival Committee (SBSC) found that Medicare Part A has been marred by regular payroll tax increases, while Part B grabs more and more general revenues. In total, between 1966 and 2000, the Medicare program has generated 36 tax increases - 26 increases in the applicable tax base, and 10 increases in the tax rate.

"These tax increases raise the cost of labor versus capital for businesses, which distorts economic decision-making for employers and hurts workers. Incentives for working and risk taking are diminished as well," said report author and SBSC chief economist Raymond Keating.

In other words, payroll taxes are burdensome and especially so for start-ups.