The High Income Rate Increases Don’t Lose Jobs

November 9th, 2012 at 12:50 am

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.

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2 comments in reply to "The High Income Rate Increases Don’t Lose Jobs"

  1. Sue says:

    In addition to claiming “job creation,” those who oppose restoring (NOT raising!) the high-income tax rates often claim that this will be a drag on demand. My intuition says this is not true and that the 1- and 2-percenters are already banking so much of their income that getting their tax rates back to Clinton-era levels wouldn’t much change their consumption. Is there any data on this? Thanks.

    • Jared Bernstein says:

      Lots of data on that. In fact, that’s the mechanism by which these types of tax changes have small multipliers. An economist named Jonathan Parker has good research on that, as I recall…maybe google his stuff.