Heritage Foundation predicts “substantial job losses” among earners of less than $250,000

The Heritage Foundation, a D.C.-based policy institute, has released a scathing report on the prospect of income tax increases for the coming year. The authors contend that while high income households may be targeted, everyone will pay the price through lower economic growth and fewer employment opportunities. In the case of Louisiana, they project that the approximately $5 billion increase in total tax revenue over the next ten years would cost the state an average of over 9,000 lost jobs each year for the next decade.

The tax increases would come about by letting some of the 2001 and 2003 tax cuts expire, which President Barack Obama has already publicly called for. Additionally, the “death tax” is set to re-emerge at a rate of 55 percent, with a $1 million exemption. According to the White House, these increases would be assigned to the “wealthiest two percent of families” – those households or businesses earning more than $250,000 per year – as part of a “comprehensive tax policy plan.”

Concurrently lower income earners may receive tax cuts, depending how congress proceeds, along with changes to available deductions. Obama is promoting this approach “to ensure we are restoring fairness and returning to fiscal responsibility.” According to Obama’s website, his “tax plan will help restore bottom-up economic growth that helps create good jobs in America and empowers all families achieve [sic] the American dream.”

The Heritage Foundation economists, however, contend that the “steep tax hikes” on businesses and households earning more than $250,000 per year will lead to “substantial job losses” for those earning less; “no income earner will be unscathed.” They point out that these taxes target investment, “one of the main drivers of economic growth and hence jobs and wages.”

The report’s authors used a method of analysis developed by IHS Global Insight, the World’s largest economic forecasting company. They then calibrated the model to American data and compared the retention of all current tax rates through to 2020 with the tax changes proposed by the Obama administration.

On the national level, with the tax proposal they found almost 700,000 fewer jobs each year for the next ten years and a $1.1 trillion total decline in the economy’s production.* For Louisiana, their breakdown places the job loss at an average of 9,244 jobs per year, peaking at 11,676 in 2016, and an average of $3,125 less disposable personal income per household. (See below for diagram.)

Karen Campbell, one of the study’s authors and a macroeconomic specialist, says “Every income class is going to be hit in some way. We live in an economy where markets tie us all together… So there is no way to affect just one part of the economy or one group in the economy.”

She also believes the federal government would deprive itself of greater revenues by stifling taxable economic activity.

“When you raise taxes on this one group, you’re going to actually slow down not just the amount of taxable income they could have generated but taxable income that every class could have generated. So you’re going to see lower payroll taxes and a lower tax base in general.”

The White House anticipates increased tax collection of $70 billion, on average over the next ten years, but based on “static” economic projections that don’t account for reduced economic activity. Her analysis points to only $26 billion, and “for that $26 billion, what we’re giving up is very high in terms of jobs.” (Click below to hear a nine minute interview with Karen Campbell, or here to open in a new tab.)
[audio:http://bit.ly/9gRDPp] On the other hand, last week the director of the Congressional Budget Office, Doug Elmendorf testified that the size of government borrowing, without tax increases, is set to impede private investment and that too would reduce economic activity.

“Those effects are largely the net result of two competing forces… Lower tax revenues increase budget deficits and thereby government borrowing, which reduces economic growth by crowding out investment. At the same time, lower tax rates boost growth by increasing people’s saving and work effort.”

The report’s authors acknowledge the severity of the current fiscal situation, but one of their subtitles explains, “It’s the Spending, Stupid.”

“Our deficits are not caused by a lack of government revenue from hard working taxpayers. Our deficits are caused by out-of-control Washington spending. Even if Obama and Congress do hike taxes, does anyone expect Congress to not spend any additional revenue?”

These economists, along with the Tax Foundation, a D.C.-based non-partisan tax research organization, also dispute the accuracy of the widely promoted $250,000 figure. To demonstrate the currently proposed tax plan’s many potential tax increases for lower income earners, the Tax Foundation has set up an online tax calculator.

Given the pressure of the upcoming congressional elections and the lack of a clear majority on the issue, Democrat leaders have delayed a vote on the Obama tax proposal until after November 2nd. However, with tax provisions set to expire automatically, they have confirmed their intent to bring the measure back before Congress before the end of the year.

Fergus Hodgson is the capitol bureau reporter with the Pelican Institute for Public Policy. He can be contacted at fhodgson@pelicanpolicy.org, and one can follow him on twitter.