

Health Bill Would Add 3.8% Tax on Investment Income - known
http://www.businessweek.com/news/2010-03-18/health-bill-said-to-add-3-8-medicare-tax-on-unearned-income.html

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rdl
This is going to hurt startups. (the health care part is theoretically nice,
but offset by the tax implications)

Short-term capital gains will be 15% (Fed) + 5% (Fed Increase in 2011) + 3.8%
(this) + 10.3% (California). 34.1% capital gains!

This does not compare favorably to anywhere else in the world. For a CA
startup founder, capital gains are going to be 1.5-3x higher than most
countries.

This is an issue primarily because (half?) of US startups are founded by
immigrants. At some point, it becomes more attractive for an immigrant to go
to Vancouver, BC (21.5% tax rate, much easier immigration process, better
quality of life than SFBA) or even to remain in India or China. The tax
advantages might also push for Hong Kong or Singapore startups, with 0%
capital gains and very low income tax.

A big number minus 34.1% is still better for an exit than a much smaller
number minus a small percentage, but California is definitely not the only
place to do a startup.

~~~
tptacek
Do you see this hurting startups in some way other than reducing immigration?

I think it will help startups, by allowing small shops to bootstrap without
having to surrender health insurance for themselves and for their families.

~~~
rdl
I think the combined CA + US tax burden might reduce marginal angel
investments. It probably won't affect VC investments, but doubling my tax
burden on a win means I'd need to double the odds of a win, or the size of the
wins, and that might not be feasible as an angel, who could otherwise spend
the money on a new boat.

I am unconvinced the health care result of this will be good enough for
someone with a family to be comfortable going on relatively inexpensive
insurance.

As a healthy, single, 20-40 year old guy with no risk of children, I'm fine
with an $80/mo catastrophic plan, and I suspect a lot of people starting
startups are the same, or have health care from a spouse's job. A single
parent is not in a great position to do a startup for a lot of reasons, and
someone with a lot of chronic health issues requiring expensive medical care
probably isn't either.

~~~
tptacek
It doesn't take ongoing chronic health issues to become uninsurable. For
instance, having an unexplained seizure when you're 4 appears to do the trick,
as does having a functioning female reproductive system.

I think there's a lot of room for reasonable people to disagree about whether
this bill will help or hurt startups. But I don't think there's room to
disagree about whether the status quo retards entrepreneurship. It does.
Health insurance could have screwed me out of my company. Health insurance
kept at least 3 candidates I can name off the top of my head from accepting a
role with us in the early days of the company. There's no countervailing
argument about how the status quo _encouraged_ someone to start a company.

~~~
rdl
The status quo of health care definitely retards entrepreneurship. Increased
taxes also retard entrepreneurship (in a historically well documented way,
although maybe the effect between 15-23.8% isn't a well tested range).

I am not sure which has a larger effect here.

I definitely would like to see some health insurance changes, just not the
ones in this bill, and not by taxing capital to pay for services to
individuals. Actually reducing costs would be my #1 approach -- politically
unpopular, but I'd be fine with subsidized or free basic care for everyone,
but no free advanced care for those without private insurance. Private
insurance purchased by individuals, with or without a tax deduction, and
totally decoupled from employers.

~~~
tptacek
What's "advanced" care?

~~~
rdl
I sent you long email describing. Basically I'd like to see public subsidized
or free health care at the NHS level (i.e. kind of crap, but good enough),
with available free relatively-unregulated private insurance and private care.
I figure it would cost $1-2k/person/yr for the public side (excluding old
people in medicare, which is another huge problem), which is a lot less than
is spent now covering marginally insured people, overhead of medicaid, etc.
I'd get employers totally out of the insurance game.

This is politically unpopular (some people WILL get lower quality free care
under this plan than they get today, and some people might get lower quality
care than under employer-provided care, if they choose to spend the savings on
something else like food or education, which might be rational!) Also, I think
the US Government is possibly more incompetent in running healthcare (I work
in DoD healthcare, so I see this firsthand...) than the UK or Canadians or
French.

~~~
tptacek
Your email was great. You should click "edit" on your post and paste the email
over your comment. I'll do the same with mine.

In the meantime, my response was: a totally standard appendectomy for a friend
of mine cost tens of thousands of dollars. That isn't a quality of care issue,
it isn't a freak incident, it doesn't involve preventative care or
externalities. Nobody is comfortable starting a company where they will be
instantly bankrupt if their kid's appendix bursts.

------
kiba
The health care bill would seem to increase demand for healthcare services
without actually increasing supply for healthcare.

Doctors takes years to train, drug trial are still expensive, amongst other
thing.

All what we're doing is adding million of individuals into the healthcare
system without balancing the supply side equation.

It would also seem to treat health care insurance as a sugar daddy of
healthcare, instead of being treated as a mechanism that reduce risks through
incentive and such. This make insurance companies big juicy targets for
healthcare providers. If people were to spend their money on the daily cost of
healthcare, they would be more conscious of the cost, thus use it only as
neccesary. Insurances would only be used in high cost emergency measures such
as cancer and other diseases, which are preventable and can be reduced by
individuals.

This reduce the demand for healthcare and give people incentives to lower
their cost their healthcare cost through insurance's discounts, thus less
strain on the supply of healthcare.

The taxation scheme also rob people incentive of saving for emergency
measures, an alternative or complement to insurance spending, which may have
the side effect of impacting long run productive growth or simply maintenance
of current productive capacity(Capitals need to be maintained or replaced), as
saving are in effect fund the production of capitals, which eventually lead to
consumer goods and services.

~~~
tptacek
Those millions of individuals are already in the health care system. The
primary impact of the bill seems to be whether their contact with the system
bankrupts them or not. Either way, the hospital isn't getting $3,500 for the
MRI they just ran.

Your concerns all seem very reasonable. In particular, the distortion of the
concept of "insurance". But, two things.

First, that distortion already took place. Providers and insurers have spent
the last two decades colluding on pricing and process in ways that transformed
Blue Cross from an insurer to a poorly-regulated utility.

Second, your concerns are orthogonal to the debate. We should train more
doctors, and we should create more tiers of service (nurse practitioner
clinics in particular). That has little to do with whether we should allow de
facto monopolies to lock consumers out of the healthcare market.

~~~
mattchew
_First, that distortion already took place. Providers and insurers have spent
the last two decades colluding on pricing and process in ways that transformed
Blue Cross from an insurer to a poorly-regulated utility._

The health care bill takes this to a whole new level, and then sets it in
stone.

Insurance and health care delivery was already a mess in the U.S. But prior to
this bill, we might have evolved or legislated some solution that was not a
stupendous giveaway to Blue Cross and Aetna. Too late now. They will never
give up the privileges they get today. They get to be toll collectors on our
outrageously overpriced health care system forever.

Meanwhile, I read articles with people celebrating because they think this
bill _protects_ them from the health insurance industry. It's all just too
depressing.

~~~
tptacek
I agree with your sentiment. But from what I can tell, the likelihood that we
were ever going to disentangle the insurers from the system was _nil_. It
would have taken a climactic reshaping of health care, like single-payer.

When I look at the well-intentioned reform ideas coming from the opposition, I
see things like "deregulate and sell across state lines". These ideas don't
weaken the grip of BCBS and Aetna; they encourage consolidation and push us
further in the direction of the Citigroup-izing of health insurance.

What's on the table will, on paper at least, ensure that startup entrepreneurs
like me can actually buy insurance on the private market. We didn't have that
ability before, at all. That's a win, from what I can see. Would I prefer not
to have BCBS and United be the vehicles for that win? Of course. But what does
that have to do with anything?

~~~
mattchew
You're right, we probably weren't going to disentangle the insurers. That is
not an argument for handing them the keys to the nation for the sake of "doing
something". Doing nothing would have been better. At a guess, doing nothing
would have resulted in attempts to reform at the state level, like
Massachusetts. I'd have preferred that outcome by a long way.

 _What's on the table will, on paper at least, ensure that startup
entrepreneurs like me can actually buy insurance on the private market. We
didn't have that ability before, at all. That's a win, from what I can see._

I do not have employer provided insurance. I buy private insurance on the
market today. It costs me about $6000 a year to insure my family of four. I
expect the cost of insurance, post-reform, to converge on the national
average, which is around $13000. That's a loss of $7000 a year for us. Maybe
somewhat less because of subsidies (we won't get much there). Maybe more, if
the cost of insurance rises post-reform as it did in Massachusetts under their
similar reform.

It is not out of the question that we will actually give up health insurance
altogether and pay the penalty instead. This would not be a win for us.

If you aren't able to get individual coverage for around $6000/year now
(national average), and would like to, then this bill will indeed be a win for
you. Of course, if you don't like the coverage you get at that price, pay it
anyway or get fined.

This is getting too long, but does it seem thinkable to you that this reform
might accelerate the increase in health care costs? I think it quite likely
myself. If it does, too bad for everyone. We're locked in now.

~~~
tptacek
It would have cost $14,000 to insure my family of four (adults in our 30s,
kids in single-digits, no pre-existing conditions). I say "would have" because
dollar figures didn't come into it: we were flatly denied coverage, first for
our daughter, who had been hospitalized several years earlier for a freak
seizure, and then for my wife.

(Note: we tried to obtain coverage ourselves, using the Internet and a
telephone. When that failed, we worked with an insurance broker friend of the
family. Neither worked.)

There was no dollar amount that would have bought us private insurance. We got
around it first by getting Erin a job that offered group coverage, and then by
setting up group health insurance at Matasano. I'm happy to say we now
subsidize coverage for all our employees.

The numbers are a red herring. COBRA vs. private health insurance costs are
not the issue that should be scaring entrepreneurs. The possibility of getting
stranded with no possible coverage option is what should be scaring them.

~~~
mattchew
_The numbers are a red herring. COBRA vs. private health insurance costs are
not the issue that should be scaring entrepreneurs._

Thousands of dollars a year in new expenses is not a red herring and is plenty
scary. It's not what's important to you, but it is going to be important to a
lot of other people.

People who have chosen catastrophic coverage, or who chose to go without
health insurance to save money are going to get hit hard by this bill. My
guess is a disproportionate number of self-employed people fall into this
category.

People will go out of business because of this bill.

~~~
tptacek
I don't think you're correct. I've read the Senate bill, though perhaps not as
carefully as you have. I don't see where it says high-deductable plans don't
qualify as health insurance for the purpose of satisfying the mandate.

I don't care about the people who choose to go without health insurance to
save money. I wind up paying for them when they get hit by a car, when their
appendix bursts, when they have a freak aneuryism, or when they fall down
their stairs.

The same arguments suggest that people who drive infrequently and carefully
should be allowed to forgo car insurance. After all, you can always sue them
when something goes wrong with their plan!

~~~
mattchew
I have not heard that catastrophic coverage is banned by the bill, but the end
of this sort of insurance is implied because of adverse selection. Either
"insurers cannot refuse coverage" will have exceptions, or reduced
cost/reduced benefit programs have to go. Maybe it will take a year or two
before the "quality standards" get enacted, but I can't see it not happening.

 _I don't care about the people who choose to go without health insurance to
save money. I wind up paying for them when they get hit by a car, when their
appendix bursts, when they have a freak aneuryism, or when they fall down
their stairs._

People go without health insurance because it is incredibly expensive. For a
lot of people it is a crappy deal, or just flat out unaffordable.

It is interesting how people who thought they couldn't afford health insurance
used to be portrayed as victims. Now they're the bad guys, they broke the
system for everyone else, and you don't need to care about them. What a
difference two years makes.

~~~
tptacek
I don't understand how your logic follows. There are no rules in the Senate
bill that cap premiums, or establish floors for the premiums of high
deductable insurance. Won't adverse selection drive down the cost of high-
deductable insurance as it becomes a proxy for "insurance for 20-30 year olds
unlikely to make claims"?

If you can afford health insurance, and health insurance is available to you,
and you decide not to buy it because you're 25 and you don't think you'll need
it, you don't deserve my sympathy. If you can't afford health insurance, you
deserve whatever we can do to make health insurance affordable to you. Please
don't try to drag me into identity politics. This isn't a "rich vs. poor"
issue.

~~~
mattchew
If the rule is cannot deny coverage, high risk people will buy the cheap
policy and then switch when they need the expensive benefits. For that matter
low risk people will switch if they roll snake-eyes and need to schedule
something expensive like reconstructive surgery. This is essentially the same
adverse selection logic that justifies the mandate.

 __*

People choosing to buy or not buy insurance has gotten reframed, and I find it
interesting to see how effectively the switch took place.

In 2008, your hypothetical 25 year old would have been portrayed as a victim,
if anything. Screwed over by the greedy health insurance companies who make it
impossible to get decent coverage at a reasonable price.

In 2010, he's the bad guy. It's his fault the system is broken. He is morally
obligated to buy that health insurance now, and if he argues that he's getting
a crappy deal for what he is paying, it's him who is being selfish and greedy.

There are certainly identity politics tangled up in health care reform, but I
was talking about the reframing of an issue and fickle public opinion.

------
raganwald
What are the startup or hacker implications?

~~~
blasdel
Less worrying about staying insured if you quit your job to found a company,
which is a huge barrier for a lot of people (especially with dependents).

More wanking over _"oh noes I might not invest in your startup now that my
payday would be taxed slightly more"_ , followed by handwringing about a
perceived slide into socialism, but nearly no change in investment behavior.
Maybe a few people cash out earlier than they would have to avoid the tax
increase.

~~~
Xichekolas
Wanking is a good word for it. I've never understood how people looking for
upside measured in the hundreds to thousands of percent can complain about a
3.8% tax with a straight face.

If you invest $100k in a startup, it goes well and you walk away with a
million ($900k profit), are you really going to cry when the tax man comes and
gets his $34,200? I guess you might, but it didn't suddenly make the
investment not worth it.

Then again, those people aren't likely the ones complaining. It's the people
who have a hypothetical model in their head of what "investors" are like and
want to use it as a talking point to attack health care reform.

~~~
pfedor
Let me start by saying that I am not opposed to the proposed healthcare
reform, since I don't know enough about it to have any opinion, and I suspect
that if I did invest the time and learned the facts I would be in favor of the
reform.

With this out of the way, your argument seems completely wrong to me. In
reality nobody can consistently get 1000% returns, or anywhere near it, from
the startups they invest in. (If that was possible, everyone would want to
invest in startups and the valuations would go up until the returns got more
in line with other investment vehicles with the same risk profile.) In
reality, for every startup where you invested $100k and walked away with $1M,
there are many where you invested $100k and walked away with zero. On average
the returns can't be much different from what you get elsewhere, I'm guessing
I won't be off by much if I say 10% before tax and before inflation. And 4%
difference in tax burden will also mean about the same it means for other
investments, which is to say it's not insignificant. Think of the lenghts
people go to in order to put a little more money in a tax sheltered part of
their portfolios. Or, think of the risks many people with stock options grants
took to convert their short term capital gains into long term (and many of
them got burnt very badly when the dot com bubble burst).

~~~
Xichekolas
I totally agree with you _in aggregate_. If you take the entirety of the
VC/Angel scene and figure out the overall return, it's probably not that much
different than other investment vehicles (it's probably a bit higher, since
there are barriers to entry, which prevents everyone from getting into the
game).

But my point was for those upper echelon's of VC/Angels who actually make
money. PG has pointed out in the past that there really are only a handful of
VC/Angels that actually consistently make money (and more importantly in the
case of VCs make money for their investors). You're right that my case was
idealized, but investment losses can also be used to offset gains for tax
purposes, and this is an industry of lawyers, so I doubt the tax effects are
as clear cut as either of us paints them to be. And I still maintain my
overall point that 3.8% isn't going to suddenly kill the startup scene. If it
was that tax sensitive, it wouldn't be in California to begin with.

