Obama Tax Plan Would Lead to Slower Growth, Lower Wages

 
 
November 01, 2012

Equivalent of 4 Million Fewer Jobs over Ten Years

Washington, D.C., November 1, 2012—A new analysis of President Obama’s tax plan finds that the higher income and estate taxes favored by the White House would lead to slower economic growth, less job creation, and less wage growth. The smaller income gains under such a scenario would also reduce tax collections, eliminating much of the expected revenue from raising rates, according to the Tax Foundation.

“Regardless of the initial distribution of a tax change, the economic reactions to a tax increase distribute the economic losses – or gains in the event of a tax decrease – across the board,” said Tax Foundation Senior Fellow Stephen Entin. “Tax increases on capital formation harm labor by reducing productivity, wages, and employment.”

The Tax Foundation’s analysis estimates that President Obama’s tax plan would gradually reduce the level of GDP by nearly 3 percent, relative to the baseline projection, over five to ten years.  Labor income would be lower by a similar amount, driven down by fewer hours worked and lower wages per hour. The reduction in hours worked would be the equivalent of about a million jobs lost in today’s economy, with those still employed earning roughly 2.28 percent lower wages, or four million jobs at unchanged pay levels.

Low income taxpayers (those earning less than $50,000) suffer a roughly $75 to $1,100 decrease in after tax income as a result of the tax program, with nearly all the reductions in income coming from a weaker economy and lower wages and fewer hours worked. The economic impact of raising taxes on the “rich,” in this case individuals earning more than $200,000, extend well beyond those high-income taxpayers.

The President has also proposed to cut the corporate rate to 28 percent, which would add over 1.6 percent to GDP and pay for itself via that increased growth. It would reduce the economic damage from the individual and estate tax hikes by about 56 percent, while increasing revenues and providing a larger reduction in the deficit. Yet even these advantages are mostly cancelled out by increases in other business taxes that the Administration has proposed.

“The irony is that if the President had merely offered to reduce the corporate tax rate to 28 percent without the offsets and without insisting on revenue neutrality, his plan would have recovered most if not all of the lost revenue,” said Entin. “By restricting the offsets to increases in the taxes on capital formation, he ensures that the reform will achieve nothing.”

Tax Foundation Fiscal Fact No. 339, “Simulating the Economic Effects of Obama’s Tax Plan” by Stephen Entin is available here.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

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