Saturday, September 12, 2009

Healthcare Reform and Small Business, Part II

It strikes me as very wrong that the United States should have fewer workers in small businesses than almost every country in Europe. Aren’t we the land of Jefferson’s citizen-farmers, Norman Rockwell’s small town businesspeople, the country of entrepreneurs and fearless risk takers?

I think the problem is that we aren’t quite fearless. I know more than one person that hesitated to strike out on their own because they didn’t want to lose their benefits—health insurance and retirement for the most part. Under our current system, that only means that people are acting as rational capitalists, because the penalties for supporting your own healthcare costs are substantial.

Let’s think through the numbers. Assume you are an exactly average American single adult worker. You make $15.57 per hour. If you work 2000 hours in a year, then your income for the year is $31,140. If you are self-employed that cost will need to be paid in after tax dollars, which means that you will need to pay at least the self-employment tax of 15.3% on your earnings plus income tax. The personal exemption and standard deduction total $9,350. Then you pay 10% income tax on your next $8,350 of income and 15% up to a total of $33,950 in taxable income. So your take home pay works like this:

Yearly income--$31,140
Self-employment tax— $4,764
Income tax--$2,851
Take home pay--$23,525 or $1,960 per month

The median average cost for healthcare in this country is $8,160 per person. That’s more than one third of your take home pay for our median American worker. Of course younger people who are healthier in general can get less expensive insurance, older Americans pay more, those with pre-existing conditions pay a lot more if they can get insurance at all, and families are also much more expensive. For many people their employer pays most of the cost, but if you’re self-employed then you are on your own.

If you just look at the median numbers, it’s clear that self-employed people at or below the median income can’t afford much in the way of health insurance. In fact, as a practical matter, almost nobody that takes home $2,000 per month is going to spend $680 of that income on health insurance. Instead our average self-employed person will go without health insurance, or at best get some kind of catastrophic policy that doesn’t cover anything but only costs $100 per month.

More likely, if they are at all concerned with insurance coverage, that person will keep their present job where their employer provides insurance.

In the end, I think that our traditional American support for both small businesses and a limited government role in healthcare are now contradictory. We need to choose between more individuals starting their own businesses and keeping government out of healthcare.

Healthcare is now such a big part of our personal and national budget that its costs are enormous burden on small businesses.

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