Republicans want to follow the CBO’s advice and cancel the tax hikes, while looking for other ways to reduce spending rather than the sequestration policies set to take effect in January. Democrats want to hold both hostage to force the GOP to agree to Obama’s proposal to raise taxes on earners over $250,000 — or $1 million, depending on which Democrats one asks, and when. Will the economic impact of those tax hikes be much different than that of the full fiscal cliff? According to a new study by Ernst and Young … no:
With the combination of these tax changes at the beginning of 2013 the top tax rate on ordinary income will rise from 35% in 2012 to 40.9%, the top tax rate on dividends will rise from 15% to 44.7% and the top tax rate on capital gains will rise from 15% to 24.7%.◼ CBO: Taxmageddon would throw U.S. back into recession - Lori Montgomery/Washington Post
These higher tax rates result in a significant increase in the average marginal tax rates (AMTR) on business, wage, and investment income, as well as the marginal effective tax rate (METR) on new business investment. This report finds that the AMTR increases significantly for wages (5.0%), flow-through business income (6.4%), interest (16.5%), dividends (157.1%) and capital gains (39.3%). The METR on new business investment increases by 15.8% for the corporate sector and 15.6% for flow-through businesses.
This report finds that these higher marginal tax rates result in a smaller economy, fewer jobs, less investment, and lower wages. Specifically, this report finds that the higher tax rates will have significant adverse economic effects in the long-run: lowering output, employment, investment, the capital stock, and real after-tax wages when the resulting revenue is used to finance additional government spending.
Through lower after-tax rewards to work, the higher tax rates on wages reduce work effort and labor force participation. The higher tax rates on capital gains and dividend increase the cost of equity capital, which discourages savings and reduces investment. Capital investment falls, which reduces labor productivity and means lower output and living standards in the long-run.
Output in the long-run would fall by 1.3%, or $200 billion, in today‟s economy.
Employment in the long-run would fall by 0.5% or, roughly 710,000 fewer jobs, in today‟s economy.
Capital stock and investment in the long-run would fall by 1.4% and 2.4%, respectively.
Real after-tax wages would fall by 1.8%, reflecting a decline in workers‟ living standards relative to what would have occurred otherwise.
◼ Long-run macroeconomic impact of increasing tax rates on high-income taxpayers in 2013 - waysandmeans.house.gov
◼ Obama's Tax Hikes Could Hit Blue States Hardest - John Merline/Investor's Business Weekly
◼ Obama's Tax Plan Flunks Bernanke's 'Do No Harm' Test - IBD Editorial
◼ Obama Rings the Death Knell on Small Business - Ed Morrissey/The Fiscal Times
