Claims About Economic Downside of Ending High-End Tax Cuts Don’t Hold Up
Posted by: Chye-Ching Huang
Posted in: 2001/2003 Tax Cuts, Congressional Action, Deficits and Projections, Federal Budget, Federal Tax, Individuals and Families, Other Issues, Poverty and Income, Recession and Recovery, Taxes and the Economy
House Ways and Means Republicans and others have cited a report — sponsored by various business interests and produced by the accounting firm Ernst & Young — claiming that letting the high-income Bush tax cuts expire would shrink employment by 0.5 percent over ten years, which the report says translates to 710,000 jobs “in today’s economy.” Analysis by the non-partisan Congressional Budget Office (CBO), however, strongly suggests that this claim is highly implausible. Here’s why:
- CBO analyses indicate that letting the high-income tax cuts expire would very likely help long-term economic growth if policymakers use the resulting revenues to help shrink deficits, as the President has proposed. Letting the high-income tax cuts expire would reduce deficits by about $950 billion over the next ten years, thereby raising national saving. That’s why CBO analyses indicate that letting those tax cuts expire likely would boost national investment and economic growth.
- The Ernst & Young report vastly overstates how much more high-income people work as a result of the tax cuts and, in working more, contribute to economic growth. It estimates that tax cuts for high-income people would increase their work hours by about ten times as much as CBO estimates. CBO’s figures are in line with empirical evidence showing that changes in tax rates don’t substantially affect high-income people’s decisions about how much to work.
- The Ernst & Young report doesn’t even address the short-run impact of letting the high-income tax cuts expire — and a new CBO report shows that they are doing a poor job of supporting the recovery. The CBO report, which we blogged about last week, shows that extending the high-income tax cuts would boost GDP by merely 0.1 percent by the end of 2013.