In comments on the fiscal cliff this morning, Speaker Boehner referenced a study by Ernst & Young allegedly finding that the expiration of the upper-income Bush tax cuts would lead to the loss of 700,000 jobs.
No, it wouldn’t. I went through why not a while ago, as this outlier result kept coming up during the election. Basically, they failed to model the actual proposal…when they did, it was a net job creator:
More importantly, they’re not simulating the right policies. The White House responded to this point:
“The study fallaciously assumes that the tax cuts are used to finance additional spending, ignoring the benefits of what the President actually proposed which was to use the revenue as part of a balanced plan to reduce the deficit and stabilize the debt. The President has proposed to let the high-income tax cuts expire and use the resulting $1 trillion in savings (over 10 years) as part of a balanced plan to reduce deficits and debt and put the nation on a sustainable fiscal course…But rather than modeling the President’s proposal to reduce the deficit, the headline numbers in the study explicitly assume that the revenue would be used entirely to finance additional spending. In fact, the study explicitly states, “Using the additional revenue to reduce the deficit is not modeled.” [Source: footnote on page 3]”
The important punchline here is that models of the economy typically find that over the long run, deficit reduction relative to consistently increasing debt/GDP is pro-growth.
But for all of that, they actually find that when they model something that’s closer to what the President is proposing — getting rid of the Bush tax cuts for high-income families, while providing additional tax cuts to the middle-class — employment grows by 0.4%, or almost 600,000 jobs (see Table 2, second column).
When they simulate the wrong scenario of new tax revenues used to support higher spending (column 1, table 2), they estimate that employment would fall by 0.5%. But if the revenue was used to finance across-the-board tax cuts, employment grows.
See also the studies I cite here on this point.
No one’s saying tax changes don’t affect the economy, but these arguments that any and all such changes are cataclysmic are the enemies of reaching compromise and avoiding the cliff.