Remove Insurance From Routine Maintenance

I believe you should purchase insurance to cover you in the worst case scenario and not to cover your office visit because you have a sore throat.  This would lower costs because primary care physicians would have to truly compete on price and service.  Dental care has vastly improved over the last 20 years because insurance only has a limited influence there.  So most consumers know how much their root canal costs and there is a vast disparity in what dentists charge for their services.  This reform would also lower costs for primary care physicians as they would no longer need to employ 2-3 full time people simply to process insurance claims.

Tort Reform

The physicians who I represent are scared to death of being sued.  To avoid being sued they practice defensive medicine and tend to order every test they can in order to be sure of their diagnosis.  We need to realize that doctors are human beings and medical science is not perfect.  Doctors are capable of making honest mistakes and should not live in fear of making them.

Expand HSA’s

I have a HSA meaning the first $5,800 in healthcare I use is on me.  This allows me to keep my premium low and have insurance for the worst case scenarios.  HSA’s are deductible for taxes making it easier for me to set funds aside to pay my deductible.  Because I am responsible for the first $5,800 of my healthcare costs I am much more aware of what things cost and feel like I make better decisions in using healthcare resources.

Refundable Tax Credits

As I see it we have an issue with people who have pre-existing conditions and those who simply cannot afford insurance.  A refundable tax credit can be offered to partially or fully subsidize their plans based on need.  This way we have covered those who are in need of coverage without having the government take it over.

Shift Tax Benefits to Individuals vs. Business

The problem with the current system is most people’s insurance is tied to their job.  I’d rather have the ability to have individuals customize their coverage and get the tax deduction rather than being forced into a group plan.  I also believe wages would go up as employers do consider the cost of subsidizing your insurance when they consider how much to pay you.  Again, this is another step to force individuals to be responsible for their healthcare and make better decisions rather than simply turn the decision making over to someone else.  When we are aware of costs we tend to create a better marketplace that responds to our concerns.

If you have insurance you will be able to keep it

I am skeptical of this due to some of the other points of his plan.  One thing that people need to understand is that in order for an insurance company to survive they must make a profit.  This contrasts with the government who can keep running deficits and printing money.

Mandates on Insurance Companies

Under the President’s plan insurance companies must:

- cover those with pre-existing conditions

- cannot drop coverage

- cannot have caps on their coverage

- would limit the amount a person would have to spend out of pocket

- Must cover an increased number of preventative and diagnostic procedures

- Would tax insurance companies who did not offer affordable coverage

If we have established the notion that an insurance company must make a profit in order to exist I am not sure how they will be able to contain their costs with these mandates.  So if we can conclude that the insurance companies cost would rise we can be certain that they would have to raise their fees in order to survive.  The trouble is that if their fees go up too much they will not be able to compete with a public option.  As more people move to the public option it will become even harder for the insurance companies to compete as they will still be forced to contend with a higher cost structure with diminished revenues.

A Public Exchange on Insurance

This would be a new term for the public option.  The public option would cover those who did not currently have insurance.  This option would be funded with taxes levied on businesses who did not offer their employees insurance and a tax on persons who did not purchase health insurance.  The current proposal calls for an 8% payroll tax on employers.  The 8% tax is curious as most employers who offer insurance pay around 10% or more of their employee’s wages for health insurance.  I believe the rate has initially been set low in order to entice businesses to drop insurance and begin the movement of people to the public option.

New Taxes and How Much Will This Cost

The President was not specific here, but the bill that passed committee imposed an excise tax of up to 5.4% on persons earning more than $300,000.  In order to pay for this plan it is hard to imagine that taxes will not go up despite the President’s claim that the plan will not add a dime to the deficit.  The non-partisan Congressional Budget Office believe that the implementation of this plan will baloon the deficit to $10 trillion dollars. 

I think healthcare can be reformed, but there are better ways to do it which I will suggest in my next post.

First off, this sets a very bad precedent.  What other employer could threaten to leave and get their local government to bail them out?  Harley Davidson is facing hard times, should we raise taxes to help them out?

The next problem I have is that it seems that only certain jobs and certain businesses are worth saving.  Right now we have an awful tax climate for business because taxes are so high, but if we have to save some union jobs we are willing to raise taxes to make the overall business climate even worse?  Will we raise taxes to help out a local accounting firm?  How about a restaurant?

What Wisconsin needs to do is get its house in order.  We are one of the highest taxed states in the Union and that’s why businesses do not want to be here and expand.  It would be much better to lower or simply eliminate the corporate tax rates in order to attract more business than raising taxes to pick and choose who gets the benefits.

Many people love corporate income taxes, but they need to understand that the cost of those taxes are passed along in the form of higher prices to the consumer or lower wages to the employee.

The Federal unemployment rate jumped to 9.7%.  To put this number in some context the unemployment rate has only exceeded 8% one other time since 1990.

The State of Wisconsin’s rate has jumped to 8.7% is has been climbing steadily.  Since 1990, Wisconsin has never experienced unemployment rates above 7% until these past few months.  Cities like Racine and Janesville have unemployment rates nearing 20%.

Economists will say that unemployment is a lagging indicator of economic health.  The rate generally goes up after the economy is already slowing down as employers are reluctant to cut staffing until the losses start to mount and it takes other factors in the economy turning around before employers feel confident enough to add people to the payroll.

I believe a few things may be different this time. 

For one thing we are now only a part of a larger global economy.  In past recoveries we did not have to compete with emerging powers like China and India.  The rise of these countries will continue to hurt our manufacturing base as conditions for doing business in those countries is much more favorable than our own.

I also believe that taxes are set to increase as plans like nationalized health insurance become law and programs like cap and trade are implemented.  This will only drive up the cost of doing business and make it harder to add employees.

The trouble is that if unemployment fails to improve quickly that consumer spending will continue to be down and that will make it hard for a recovery to sustain itself. 

If you own a business it might be best to plan on your sales continuing to remain flat for some time.

The American Opportunity  Credit

This has essentially replaced the Hope Credit.

You can receive a credit of up to $2,500 in this program.  A credit is a dollar for dollar reduction in your tax burden.  The credit is computed by taking 100% of the first $2,000 of expenses you have and then the 25% of the next $2,000 of expenses.

Unlike other programs this credit is partially refundable.  Even if you pay no income taxes the government will send you up to $1,000 back.

In order to take advantage of this credit you must be in the first 4 years of your post secondary education and your income must be lower than $80,000 if you are single and $160,000 if you are married.

Lifetime Learning Credit

This credit can be worth up to $2,000.  It is computed by multiplying the first $10,000 of educational expenses by 20%.

This is not a refundable credit meaning you will only receive a credit to the extent that you have a tax liability.

Unlike the American Opportunity Credit which can only be taken in the first 4 years of post-secondary education you can take this credit if you are on the 7 year plan (a la John Belushi in Animal House) or if you are simply taking a class or two. 

The income limits on this credit is $58,000 for single persons and $116,000 for married couples.

Tuition and Fees Deduction

If you choose to bypass the aforementioned credits you can deduct up to $4,000 for educational expenses on your tax return.  A deduction merely lowers the amount of your taxable income and is not a direct reduction of your income tax liability.  In other words, a deduction is not as valuable as a credit.

To claim this deduction your income must be under $65,000 if you are single and $130,000 if you are married.

Who Gets the Credit?

The credits and deductions follow the dependency deduction and it does not matter who is paying for the educational expenses.  This means that if you have a dependant child the tax savings are only available to you and not the child regardless of whether or not loans have been taken or your child is paying their own way. 

What Qualifies as an Educational Expense?

Tuition and fees are qualified as expenses.  The American Opportunity Credit and the Tuition and Fees Deduction has broadened the definition of expense to include supplies and materials needed to enroll in classes.

The economic indicators that have come out are only showing that the economy is going down at a slower pace than it was a few months ago.  While this may indicate that we are finding a bottom to the current economic problems it does not signal that things are bouncing back.  In my opinion two things need to happen to spur a recovery.

- The housing market must bounce back

- The stock market needs to reach 12,000

The reason these two markets need to bounce back is that most of our wealth is tied up in our homes and our retirement accounts.  This wealth has been diminished over the last 2 years and has dampened consumer confidence.  If you’ve watched the value of your home sharply decline or your retirement take a beating it becomes likely that you will be more cautious about how you spend your income.  The buying habits of the consumer have changed to reflect people’s increasing nervousness with their financial security.  People have become more frugal and that dampens demand in the economy. 

If consumer demand drops off it leads to businesses having to revise their plans and this has resulted in increased unemployment.  The job loss trend will not be reversed until people get some confidence that the wealth they have amassed in thier homes and retirement plans is secure.  If people feel good about these assets they will start spending money again.

So how can government help stimulate these two markets?

I would consider expanding the tax credit for new home buyers to anyone who is purchasing a home.  The current tax credit only extends to new buyers and quite frankly it is very difficult for a brand new buyer to secure financing to purchase a home.

The government should also consider lowering taxes on investment income and capital gains.  If you lower the cost of capital you increase the incentive to start investing again and thereby get the markets moving.  It has also been shown the lowering the capital gains rates increases tax revenues, so the government comes out ahead as well.

The ordinary and necessary threshold comes mostly into play when it comes to expenses that can seem personal in nature at first glance.  Expenses like meals, entertainment, travel, automobile and some others always seem to get increased scrutiny from an auditor because it can be difficult to separate what is business and what is pleasure. 

While having receipts for these expenditures is important you may want to bolster the evidence for these deductions by doing the following:

Meals and Entertainment

On the receipt I write down which client that I have met with.  In some cases I will also briefly summarize the purpose of the meeting. 

Travel

I document the purpose of the travel expense.  If I am traveling to a conference or training I keep a copy of the agendas that the conference passes out. 

Automobile

I keep a simple mileage log that shows the date of travel, the place visited, and the amount of miles the trip was.  I have also seen clients simply you their schedule to document their mileage.

This is good news for business.  Doyle is an anti-business governor, but he’s also a very good politician and beating him in 2010 was no sure thing even with his low polling numbers. 

It will be interesting to watch what the Democrats do with this open seat.  Lt. Governor Barabara Lawton will make a run, but she’s extremely left wing and lacks Doyle’s political skills.  Congressman Ron Kind is rumored to run, but he has a safe congressional seat that he’d have to give up in order to run.  Milwaukee Mayor Tom Barrett will be mentioned, but he also has a very safe job right now.  Unlike Ron Kind, Barrett would not have to give up his current job in order to run.  However, a failed run may make him a target in a mayoral race.

Keep Your Receipts

This sounds like a simple step, but it is amazing how many people do not keep most of their receipts.  Unlike criminal law where you are innocent until proven guilty, tax law holds that you are guilty until proven innocent.  The burden of proof is on you to prove that your deductions are valid and having a receipt is a key element of providing proof.  

I would recommend that you keep your receipts in some logical order either by month or by vendor.  This will make receipts easy to reference should you be audited.

Receipts should be kept for 7 years.

Keep Good Books

This sounds logical as well, but it is important that whomever is keeping the accounting records in your business at least has some working knowledge of accounting.  If you know the basics the chances are that your records will be clean and organized which will demonstrate that you take your accounting seriously and will limit the amount of questions that an auditor must ask you.  

Hire a CPA or Attorney

If you are going through an audit it is important to have a professional who has been through the process advocating for you.  A CPA or attorney can talk to an auditor on a peer to peer basis and can also make sure that you are getting a fair shake.  No one expects you to be an expert in tax law, so you will want someone who understands what an auditor is looking for and can answer the auditor’s questions in a clear and concise manner.  

Meals, Entertainment and Travel

Auditors tend to examine these expenses more closely especially if these expenses are substantial.  In addition to the receipts for these expenses it is helpful to document the reason for the expense, who you were meeting with, and what the business purpose of the expense was.  Auditors want to make sure that you aren’t deducting your family vacation in the business.

Be Nice to the Auditor

Contrary to popular belief auditors are human beings.  While they do strive to be professional it is probably impossible for them to keep their personal biases out of the engagement.  I have seen clients be mean to auditors and in turn the auditor chose to scrutinize everything more closely.  Conversely, I have seen cordial clients receive the benefit of the doubt on small issues.  To be sure, being a nice guy does not allow you to ignore the law, but it can make the small issues easier to resolve.

Control the Flow of Information

Give the auditor the information they ask for and nothing more until they ask for it.  Do not allow the auditor access to your employees.  The reason you do this is to ensure the auditor does not see or hear something out of context that makes them want to expand the scope of their audit.

Can you promise me I will not lose my current plan or doctor?

The reality is that the private sector cannot compete with the government.  As I have noted before the government does not need to make a profit and they can use their power to dictate terms to a medical provider.  A private insurance company needs to make profits in order to survive and they can only negotiate terms with medical providers.  I also believe that the government has set the proposed new payroll tax at rate which many companies will choose to pay the tax and drop insurance as the cost will be lower.  As more people navigate to the public option the more difficult it will be for the private sector compete and more and more people will move to the public option.  Don’t believe me, ask liberal economist Paul Krugman.

Can you promise that you and your family will enroll in the public option?

Given that the Democrats struck down an amendment that they be forced to take the public option should this bill be passed I think it’s safe to say that the politicians will keep their PRIVATE plans as long as they possibly can.  Currently, members of congress choose from a plethora of private plans for their health insurance needs.

Can you promise the plan will not increase the deficit?

The Congressional Budget Office is an independent group and they believe the plan will add loads to the deficit.  Simple common sense dictates that if Congress could screw up their estimates on the Cash for Clunkers Plan so royally how can we expect them to truly understand the costs of this plan.

Yes, problems exist with healthcare.  These problems can be addressed by changing the way we get our insurance by simply moving the tax benefits to the individual rather than the employer and expanding programs like Health Savings Accounts.  Transparency and competition on price would also be helpful.  Gaps for people with pre-existing conditions and low incomes will still exist, but those are problems the government can realistically fix without an overhaul of the entire system.