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The study was released at a time when President Obama and congressional Democrats are calling for the Bush tax cuts to expire for taxpayers who earn more than $250,000 a year, while congressional Republicans argue that the current tax rates should remain in place for taxpayers at all income levels.
The Ernst & Young study argues that if the top tax rates were allowed to increase at the end of the year, along with several other taxes affecting upper-income taxpayers, output in the long-run would fall by 1.3 percent, or $200 billion, in today’s economy. The study also predicts that employment in the long-run would fall by 0.5 percent or, roughly 710,000 fewer jobs, in today’s economy. Capital stock and investment in the long run would fall by 1.4 percent and 2.4 percent, respectively, according to the study, and real after-tax wages would fall by 1.8 percent, reflecting a decline in workers‟ living standards relative to what would have occurred otherwise.
The study is based on several assumptions, however. It assumes that the top two tax rates would increase from 33 to 36 percent and from 35 to 39.6 percent. In addition, it assumes the reinstatement of the limitation on itemized deductions for high-income taxpayer, known as the “Pease” provision. It also assumes that dividends would be taxed as ordinary income at a top income tax rate of 39.6 percent and there would be an increase to 20 percent in the top tax rate for capital gains. In addition, it assumes an increase in the 2.9 percent Medicare tax to 3.8 percent for high-income taxpayers and the application of the new 3.8 percent tax on investment income, including flow-through business income, interest, dividends and capital gains.
The study was funded by several conservative-leaning business groups, the U.S. Chamber of Commerce and the National Federation of Independent Business, along with the Independent Community Bankers of America and the S Corporation Association.
Republicans pointed to the report as evidence that the Obama administration’s tax policies would harm the economy.
“This report is more proof that the President doesn’t understand the economy or what it takes to create jobs in this country,” said House Ways and means Committee chairman Dave Camp, R-Mich., in a statement Tuesday. “After more than three years of high unemployment, slow growth and record levels of stimulus spending, the Obama Administration appears ready and willing to further derail our economic recovery by raising taxes on small businesses. We need these employers and investors creating more paychecks, not paying more taxes. Rather than double down on tax hikes that will make it harder to get America back to work, it is time to stop the tax hike—for all taxpayers—and move forward with comprehensive tax reform that will provide the certainty these entrepreneurs need.”
Speaker of the House John Boehner, R-Ohio, also pointed to the new report. “This Ernst & Young study shows the president’s small business tax hike threatens more than 700,000 jobs, and will lead to even less economic growth, less investment, and lower wages for American workers,” he said in a statement. “Our economy is still struggling under President Obama’s policies, and his massive tax hike will only make things tougher. It’s one of the worst possible ideas at one of the worst possible times for families and small businesses.”
Boehner said the House will vote this month to stop all of the tax hikes, and to lay the groundwork for a fairer, simpler Tax Code that closes loopholes, lowers rates for everyone, and helps bring home some of the jobs that have gone overseas. “Most Americans understand that if we raise taxes on job creators, we’re going to have fewer job,” he added. “If Democrats want to keep threatening to raise taxes and risk tanking our already-weak economy, the American people will hold them accountable.”
Obama has been pushing to limit the tax cut extension to middle-class taxpayers. During his weekend address Saturday, Obama highlighted the contrast between his policies and the Republicans’.
“One path—pushed by Republicans in Congress and their nominee for President—says that the best way to create prosperity is to let it trickle down from the top,” he said. “They believe that if we spend trillions more on tax cuts for the wealthy, it’ll somehow create jobs—even if we have to pay for it by gutting education and training and by raising middle-class taxes. I think they’re wrong. We already tried it that way for most of the last decade, and it didn’t work. We’re still paying for trillions of dollars in tax cuts that benefited the wealthiest Americans more than anyone else; tax cuts that didn’t lead to the rise in wages and middle class jobs that we were promised; and that helped take us from record surpluses to record deficits. The last thing we need right now is more top-down economics. What we need are policies that will grow and strengthen the middle class; that will help create jobs, make education and training more affordable, and encourage businesses to start up and stay right here in the United States.”
Rep. Sander Levin, the ranking Democratic member of the House Ways and Means Commtitee, disagreed with the Ernst & Young report's findings. “The study’s bias is obvious, its methodology is flawed and its purpose is clear: Republicans are seeking every opportunity to repeat a tired and discredited claim about small businesses in an effort to protect the highest earners from contributing toward deficit reduction," he said in a statement. "Their claim about the impact of the President’s proposal on small businesses is as hollow as it is insulting to the 97 percent of small businesses that would see their tax cuts extended under the plan. The fact is that extending the high-income tax cuts would cost $850 billion and it is far past time for Republicans to join with Democrats in asking the very wealthiest to contribute toward deficit reduction.”
