Tax hikes will slow growth, kill jobs -- but won't reduce the debt

Reuters

U.S. President Barack Obama (L) meets with Jason and Ali McLaughlin and their son Cooper in the dining room of their home in Cedar Rapids, Iowa, July 10, 2012. Obama flew to Iowa for an event pushing for the extension of Bush-era tax cuts due to expire at the end of 2012.

Article Highlights

  • Last week’s Senate vote would mean a tax hike for high-income Americans.

    Tweet This

  • Hopefully voters will understand that the real choice is not between rich and poor, but growth and stagnation.

    Tweet This

  • The impact of high tax rates on small business owners is that they have less money to hire new workers.

    Tweet This

Last week, the Senate voted in favor of the Democrats's tax plan to extend the Bush tax cuts for Americans earning less than $200,000 and against the Republicans' tax plan for extending the cuts to all Americans. This would mean a tax hike for high-income Americans.

While neither bill is expected to become law, the political posturing is intended to portray a stark divide between the two parties before the November elections. The Democrats, in particular, want to depict the Republican Party as beholden to the rich, while creating the image that their own party—President Barack Obama's party—represents the true interest of the poor and middle class. Hopefully, voters will see past this façade, and understand that the real choice is not between rich and poor, it's between growth and stagnation, and it's between having a successful debt reduction and a failed one.

Basic economics suggest that higher tax rates reduce the benefit of working and therefore cause people to work less. They also dampen consumption because people with lower after-tax incomes consume less. This holds for people of all income classes—those earning more than $200,000 and those earning less. The additional impact of high tax rates on small business owners is that they are left with insufficient capital to invest in their businesses and have less money to hire new workers. Empirical research in economics widely documents these effects on small business owners.

What's more, tax hikes are not even very effective at reducing long-run debt. Research by several economists, including a recent paper coauthored with one of us, indicates that strategies for reducing deficits and debt that rely on tax hikes are much less likely to succeed than those that rely on reductions to government spending, particularly entitlement programs. If these cuts would occur they might also dampen consumption, but the bulk of that effect would come in many years when the economy is stronger.

Obama argues that the rich need to pay more to "pay their fair share." You may agree or disagree depending on your ideology. But what should be obvious is that now is not the time to raise taxes—on anyone. When economists place the chance of the United States entering another recession at a non-trivial 20 percent, unemployment is stagnant at 8.2 percent, and the Congressional Budget Office predicts that debt as a share of GDP will double in less than 20 years, it is surprising that any party would support a policy that will slow growth, kill jobs, and ineffectively reduce debt in the long run. Unless, of course, attacking the rich wins votes.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Aparna
Mathur
  • Aparna Mathur is an economist who writes about taxes and wages. She has been a consultant to the World Bank and has taught economics at the University of Maryland. Her work ranges from research on carbon taxes and the impact of state health insurance mandates on small firms to labor market outcomes. Her research on corporate taxation includes the widely discussed coauthored 2006 "Wages and Taxes" paper, which explored the link between corporate taxes and manufacturing wages.
  • Phone: 202-828-6026
    Email: amathur@aei.org
  • Assistant Info

    Name: Hao Fu
    Phone: 202-862-5214
    Email: hao.fu@aei.org

 

Matthew H.
Jensen
  • Matthew Jensen is a research associate for economic policy studies. He maintains an active research agenda focused on public finance and taxation, and he coordinates the ongoing development of AEI’s International Tax Database. Jensen has written for The Wall Street Journal, US News, and Tax Notes, among others, and he frequently appears on radio and television. Before joining AEI, he worked for a hedge fund in Minneapolis.


    Follow Matthew Jensen on Twitter.

  • Email: Matt.Jensen@AEI.org

What's new on AEI

image Recovering from tax time blues
image 10 welfare reform lessons
image Let HHS nominee Sylvia Burwell explain Obamacare lie
image Why bold ideas backfire in politics
AEI on Facebook
Events Calendar
  • 14
    MON
  • 15
    TUE
  • 16
    WED
  • 17
    THU
  • 18
    FRI
Wednesday, April 16, 2014 | 10:00 a.m. – 11:00 a.m.
Calling treason by its name: A conversation with Liam Fox

Join us at AEI as the Right Honorable Liam Fox sits down with Marc Thiessen to discuss and debate whether America’s intelligence agencies have infringed on the personal privacy of US citizens.

Event Registration is Closed
Thursday, April 17, 2014 | 4:00 p.m. – 5:00 p.m.
The curmudgeon's guide to getting ahead

How can young people succeed in workplaces dominated by curmudgeons who are judging their every move? At this AEI book event, bestselling author and social scientist Charles Murray will offer indispensable advice for navigating the workplace, getting ahead, and living a fulfilling life.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.