Would Rep. Cantor’s “Job Creation” Tax Cut Create Jobs?

March 28, 2012 at 3:58 pm

House Majority Leader Eric Cantor describes his proposed business tax cut as “a small business jobs creation tax cut bill that goes right to the heart of job creation in our country,” but our new analysis explains why it would more likely provide a windfall for the wealthy than create many jobs.  Here’s the opening:

Millionaires Would Receive Nearly Half of Cantor Small Business Tax Cuts

Though billed as a measure to create jobs by aiding small businesses, House Majority Leader Eric Cantor’s (R-VA) proposal for a 20 percent tax deduction in 2012 for businesses with fewer than 500 employees would benefit many high-income taxpayers — including many affluent doctors, lawyers, and stockbrokers — while failing to generate the promised economic benefits.  The Urban-Brookings Tax Policy Center estimates that nearly half — 49 percent — of the $46 billion tax cut that the measure would provide would go to people with incomes over $1 million a year (see graph).

The Congressional Budget Office (CBO) rated this general approach as one of the least cost-effective ways that policymakers were considering to encourage growth or create jobs in a weak economy.  For one thing, the tax benefits would flow disproportionately to high-income people who would spend a relatively small share of their additional income; thus, CBO estimated that the deduction would generate just 0 to 20 cents in economic growth for every dollar in budgetary cost.  For another, firms would receive this tax break whether they hired new workers or not; thus, CBO estimated that in 2012 it would create one job or fewer per $1 million of budgetary cost.

Click here for the full report.

Budget from Reps. Cooper and LaTourette Doesn’t Live Up to Its Name

March 28, 2012 at 1:51 pm

We’ve released an analysis of the new budget proposal from Reps. Jim Cooper and Steven LaTourette.  Here’s the opening:

Reps. Jim Cooper (D-TN) and Steven LaTourette (R-OH) unveiled a budget plan on March 27 that they call the “Simpson-Bowles Budget.”  It departs significantly, however, from the Simpson-Bowles commission plan in key respects — raising taxes much less, cutting much more from non-security discretionary programs and less from defense and other security programs, and, as a result, providing a blueprint that’s significantly to the right of the Simpson-Bowles commission plan.

The Senate’s Gang of Six proposal last summer showed that policymakers can design a balanced, relatively well-designed deficit-reduction package using the framework of the Simpson-Bowles commission report.  Unfortunately, the Cooper-LaTourette plans falls well short of the Gang of Six plan and does not represent the same type of balanced policy.

Click here for the full report.

Another Quarter-Million for Millionaires Under Ryan Tax Plan

March 28, 2012 at 1:17 pm

Our new report shows that House Budget Committee Chairman Paul Ryan’s tax plan would provide $265,000-a-year tax cuts to the nation’s highest-income households.  Here’s an excerpt:

Millionaires Would Receive More Than One-Third of New Ryan Tax Cuts

Even as House Budget Committee Chairman Paul Ryan’s budget would impose trillions of dollars in spending cuts, 62 percent of which would come from low-income programs, it would enact new tax cuts that would provide huge windfalls to households at the top of the income scale.  New analysis by the Urban-Brookings Tax Policy Center (TPC) finds that people earning more than $1 million a year would receive $265,000 apiece in new tax cuts, on average, on top of the $129,000 they would receive from the Ryan budget’s extension of President Bush’s tax cuts. . . .

Underscoring how tilted the proposal is toward the top, the TPC figures show that people making more than $1 million a year would receive 37 percent of the new Ryan tax cuts even though they constitute less than one-half of one percent of U.S. households (see graph).

Click here for the full report.

Ryan Plan Unlikely to Balance the Budget for Decades

March 28, 2012 at 10:52 am

Despite its massive spending cuts, House Budget Committee Chairman Paul Ryan’s budget (which the House is considering this week) would still have a deficit of $287 billion in fiscal year 2022.  And the Congressional Budget Office estimates that it wouldn’t produce a surplus until 2040.

Chairman Ryan disagrees, saying in a report that if you factor in the great boost that his tax proposals would give to the economy, his plan could balance the budget by the end of this decade.  But his case is unconvincing.

The Ryan plan proposes to replace the current individual income tax system with two brackets — 10 percent and 25 percent — for ordinary income and no alternative minimum tax, with a top corporate rate of 25 percent.  These changes would reduce revenues by $4.6 trillion over ten years (compared to the revenue levels if Congress extended all of President Bush’s 2001 and 2003 tax cuts, including those benefitting only upper-income taxpayers), according to the Urban Institute-Brookings Institution Tax Policy Center.  Chairman Ryan says his plan will fully offset that revenue loss by cutting tax expenditures (credits, deductions, and other preferences), but he hasn’t provided any details.

Chairman Ryan’s report assumes that his tax reform, if enacted in 2013, would boost economic growth by as much as one percentage point a year for a decade starting in 2015; by 2019, that would produce enough extra revenues to balance the budget.  It cites a review of the literature on the economic effects of tax reform by economists Alan Auerbach and Kevin Hassett.  But what Auerbach and Hassett wrote — that “the literature suggests that a wholesale switch to an ideal [tax] system might eventually increase economic output by between 5 and 10 percent, or perhaps a slightly wider range” — doesn’t support Chairman Ryan’s claim for several reasons.

First, and most importantly, the Ryan tax proposals would fall far short of the fundamental tax reform that Auerbach and Hassett were discussing, which would effectively replace the current income tax with a national consumption tax.  Such reform plans would eliminate all tax expenditures, including tax breaks for such things as homeownership, charitable contributions, and employer-provided health insurance.  That the Ryan plan fails to specify any tax expenditures for cuts is just one sign of the political difficulty of substantially reducing them, much less eliminating them.

As economist William Gale notes in the Auerbach-Hassett book cited above, the type of tax reform economists are discussing would “cause significant relocation in the economy, and declines in charitable contributions, real housing prices and the number of households with health insurance.”  Furthermore, such a pure tax reform plan would be far more regressive than the current system, with lower- and middle-income taxpayers paying more and people at the top getting even bigger tax cuts than they would get from extending the expiring Bush tax cuts.  Mitigating these effects would require higher tax rates, which would reduce or eliminate the longer-term economic benefits of tax reform.

As Gale concludes, when tax reform is “subjected to the realistic considerations noted above and the higher tax rates such considerations would require, studies suggest that the [new tax system] would likely generate little if any net growth and could actually reduce growth.”

Second, Auerbach and Hassett’s conclusion that “a wholesale switch to an ideal system might eventually increase economic output by between 5 and 10 percent” (emphasis added) is far from Chairman Ryan’s claim that if Congress enacts tax reform in 2013, output will likely be 5 percent higher by 2019, as the Ryan report apparently assumes.

Third, as Auerbach and Hassett point out, the consensus in the economic literature about the possible effects of fundamental tax reform “may exist because all the models employed by economists have relied upon some simplifying assumption that will eventually be found inappropriate.  That is, it might well be that the models will be poor predictors of experience.”

The bottom line is this:  the tax reform reflected in the Ryan plan will not likely boost the economy significantly.  Even if policymakers enact and sustain the Ryan plan’s massive spending cuts, the budget probably wouldn’t be balanced much before 2040.

Chairman Ryan’s Misleading Chart

March 27, 2012 at 4:59 pm

House Budget Committee Chairman Paul Ryan recently summarized his new tax proposal this way:

[W]e’re saying get rid of all the special interest loopholes and tax shelters that are disproportionately used by those higher income earners, get rid of those tax shelters, so you can lower tax rates for everybody, and make us better wired for economic growth and job creation.

Chairman Ryan has also said that most tax-expenditure benefits go to high-income people.

The lead tax chart in Chairman Ryan’s budget document seems to support his statement, suggesting that the tax code includes a series of egregious loopholes (or “tax expenditures”) that mostly flow to very rich individuals.  It gives the impression that we can easily eliminate tax expenditures for the very wealthy and thereby pay for lower rates for all taxpayers — including the Ryan plan’s big reduction, to 25 percent, in the top income tax rate.

Who Benefits From Tax Loopholes

The chart in question is based on data from the Urban-Brookings Tax Policy Center (TPC).  But it does not show what Chairman Ryan suggests it does, for two key reasons.

First, the chart shows tax-expenditure benefits per person.  There obviously are far fewer people in the top 1 percent of the population than in the other income groups shown, each of which consists of 20 percent of the population.  So, the top 1 percent receives a much smaller share of the total benefits of tax expenditures — and the other income groups receive much larger shares —than a quick look at this graph might lead you to think.

Second, the graph covers all tax expenditures, including the preferential tax rate for capital gains and dividends.  Fully 75 percent of the benefits of that tax expenditure flow to the top 1 percent of people.  But Chairman Ryan’s budget essentially rules out raising the low capital gains and dividend tax rate.

The long document that Ryan issued on March 20 presenting his budget takes President Obama to task for proposing to let the capital gains rate on high-income households return to the 20 percent level at which it stood before the Bush 2003 tax cuts (as compared to today’s 15 percent rate) and declares, “Raising taxes on capital is another idea that purports to affect the wealthy but actually hurts all participants in the economy.”

Once you take the capital gains and dividends preference off the table, the benefits of the remaining tax expenditures are fairly evenly distributed across income groups, as the next graph shows.  This is a very different picture than that which Chairman Ryan’s graph seems to depict.

Curbing Tax Expenditures Would Affect All Income Groups

The biggest of these tax expenditures are the mortgage interest deduction and the exclusion for employer-provided health insurance.  Both are ripe for progressive reform; for example, why should the government subsidize mortgage interest at a 35 percent rate for a wealthy banker but at a 15 percent rate for a middle-income welder?   But, neither fits Chairman Ryan’s description of “special interest loopholes and tax shelters that are disproportionately used by those higher income earners.”  Elimination of the exclusion for employer-provided health insurance, for example, would hit the middle class harder than very high-income people.

Also keep in mind that the Ryan budget would use the revenue from reducing tax expenditures not to reduce our unsustainable long-term deficits but to help finance a cut in tax rates that would disproportionately benefit the wealthiest people in the country.   TPC estimates that the rate cuts (and other Ryan tax reductions) would raise after-tax incomes by 12.5 percent among people making more than $1 million a year — providing them an average annual tax cut of $265,000, on top of an average annual tax cut of $129,000 from making the Bush tax cuts permanent — but by just 1.9 percent among middle-income households.

The Ryan budget thus would lower the taxes of the nation’s most affluent people even if that means failing to contribute to deficit reduction and/or shifting tax burdens to middle- and lower-income families.