A new report from Ernst & Young finds that allowing tax cuts to expire for upper-income taxpayers would cost the economy approximately 710,000 jobs.
Dave Camp
The study was released at a time when President Obama and congressional Democrats are calling for the Bush tax cuts to expire for taxpayers who earn more than $250,000 a year, while congressional Republicans argue that the current tax rates should remain in place for taxpayers at all income levels.
The Ernst & Young study argues that if the top tax rates were allowed to increase at the end of the year, along with several other taxes affecting upper-income taxpayers, output in the long-run would fall by 1.3 percent, or $200 billion, in today’s economy. The study also predicts that employment in the long-run would fall by 0.5 percent or, roughly 710,000 fewer jobs, in today’s economy. Capital stock and investment in the long run would fall by 1.4 percent and 2.4 percent, respectively, according to the study, and real after-tax wages would fall by 1.8 percent, reflecting a decline in workers‟ living standards relative to what would have occurred otherwise.
The study is based on several assumptions, however. It assumes that the top two tax rates would increase from 33 to 36 percent and from 35 to 39.6 percent. In addition, it assumes the reinstatement of the limitation on itemized deductions for high-income taxpayer, known as the “Pease” provision. It also assumes that dividends would be taxed as ordinary income at a top income tax rate of 39.6 percent and there would be an increase to 20 percent in the top tax rate for capital gains. In addition, it assumes an increase in the 2.9 percent Medicare tax to 3.8 percent for high-income taxpayers and the application of the new 3.8 percent tax on investment income, including flow-through business income, interest, dividends and capital gains.
The study was funded by several conservative-leaning business groups, the U.S. Chamber of Commerce and the National Federation of Independent Business, along with the Independent Community Bankers of America and the S Corporation Association.
Republicans pointed to the report as evidence that the Obama administration’s tax policies would harm the economy.
“This report is more proof that the President doesn’t understand the economy or what it takes to create jobs in this country,” said House Ways and means Committee chairman Dave Camp, R-Mich., in a statement Tuesday. “After more than three years of high unemployment, slow growth and record levels of stimulus spending, the Obama Administration appears ready and willing to further derail our economic recovery by raising taxes on small businesses. We need these employers and investors creating more paychecks, not paying more taxes. Rather than double down on tax hikes that will make it harder to get America back to work, it is time to stop the tax hike—for all taxpayers—and move forward with comprehensive tax reform that will provide the certainty these entrepreneurs need.”
Speaker of the House John Boehner, R-Ohio, also pointed to the new report. “This Ernst & Young study shows the president’s small business tax hike threatens more than 700,000 jobs, and will lead to even less economic growth, less investment, and lower wages for American workers,” he said in a statement. “Our economy is still struggling under President Obama’s policies, and his massive tax hike will only make things tougher. It’s one of the worst possible ideas at one of the worst possible times for families and small businesses.”
Boehner said the House will vote this month to stop all of the tax hikes, and to lay the groundwork for a fairer, simpler Tax Code that closes loopholes, lowers rates for everyone, and helps bring home some of the jobs that have gone overseas. “Most Americans understand that if we raise taxes on job creators, we’re going to have fewer job,” he added. “If Democrats want to keep threatening to raise taxes and risk tanking our already-weak economy, the American people will hold them accountable.”
Obama has been pushing to limit the tax cut extension to middle-class taxpayers. During his weekend address Saturday, Obama highlighted the contrast between his policies and the Republicans’.
“One path—pushed by Republicans in Congress and their nominee for President—says that the best way to create prosperity is to let it trickle down from the top,” he said. “They believe that if we spend trillions more on tax cuts for the wealthy, it’ll somehow create jobs—even if we have to pay for it by gutting education and training and by raising middle-class taxes. I think they’re wrong. We already tried it that way for most of the last decade, and it didn’t work. We’re still paying for trillions of dollars in tax cuts that benefited the wealthiest Americans more than anyone else; tax cuts that didn’t lead to the rise in wages and middle class jobs that we were promised; and that helped take us from record surpluses to record deficits. The last thing we need right now is more top-down economics. What we need are policies that will grow and strengthen the middle class; that will help create jobs, make education and training more affordable, and encourage businesses to start up and stay right here in the United States.”
Rep. Sander Levin, the ranking Democratic member of the House Ways and Means Commtitee, disagreed with the Ernst & Young report's findings. “The study’s bias is obvious, its methodology is flawed and its purpose is clear: Republicans are seeking every opportunity to repeat a tired and discredited claim about small businesses in an effort to protect the highest earners from contributing toward deficit reduction," he said in a statement. "Their claim about the impact of the President’s proposal on small businesses is as hollow as it is insulting to the 97 percent of small businesses that would see their tax cuts extended under the plan. The fact is that extending the high-income tax cuts would cost $850 billion and it is far past time for Republicans to join with Democrats in asking the very wealthiest to contribute toward deficit reduction.”
14 Comments
I am stunned by many of these comments. I don't know if the E & Y report is biased. I haven't read it. Have any of the folks posting actually read it? The only bias I can see for sure is expressed in many of these posts.
Posted by: taxideas | July 19, 2012 4:00 PM
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It is disappointing to see an accounting firm, Ernst & Young, weighing blindly in on political debate without the carefulness people would expect from certified public accountants. The Bush tax cuts followed huge surpluses left by the Clinton Administration: if tax cuts for the wealthy created jobs, why did the Bush administration end with the great depression and the millions of jobs lost? Would it not have followed that we would have growth in jobs from the Bush tax cuts rather than woeful loss of jobs? If we, as CPAs simply chime in and provide biased input into the political debate, is that not going to impugn our credibility? The big accounting firms also argued that providing attest services to firms they were simultaneously providing management advisory services and other consultation did not impair their independence. With the loss of Arthur Anderson following the Enron debacle, we got SOX and PCAOB to bring some sanity. Acting out of bias and senselessly weighing in on the side of the 1% will ruin the reputation of the accounting profession, link us inextricably to the unjust society that would result. Unjust societies are, inherently, unsafe societies; those who blindly keep pushing for unjust outcomes will ruin it all for everybody! Sol
Posted by: Ahiarah | July 19, 2012 2:59 PM
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The idea of trickle down economics (ie. the idea that tax breaks or other economic benefits provided by government to businesses and the wealthy so they have the ability to hire additional employees or increase employment) is FALSE. Companies WILL NOT hire additional employees if there is no demand for their product, or if there is no PROFIT to be made (EVEN IF they have the resources to do so)...The REALITY is Business WILL HIRE additional personal IF there is a DEMAND, for their product or service, to be filled. Business managers will even put their companies into debt in-order to hire ADDITIONAL employees to fill increasing demand needs, knowing that it WILL create a profit...
Posted by: matthens | July 18, 2012 8:01 PM
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since only 75% of the nation's wealth is with ONLY 5% of the population (10% hold 83%, 20% hold 93%), that DOES NOT create a strong economy for a "FREE MARKET" system...part of the reason is that that 5% of the population DOES NOT MAKE UP 75% of our nations consumption...The notion that creating a fiscal responsible budget will solve ALL the nation's problem is FALSE and backing off the economy as a gov't is the OPPOSITE of what the gov't should do in a RECESSION...WE MUST invest more in the economy as a govt, and be FOCUS on investing in Education, Infrastructure, and Research and development in order to open up new revenue streams for the nation (that is what the GOV'T is responsible for) Investment in EDUCATION and Research and Development will INCREASE employment, primarily in the middle class which makes up the bulk of the CONSUMER CLASS, and increase in consumption. (ie, they MAKE UP the BULK of our nations consumption...and helping the consumer class out makes for a STRONG economy in a capitalist system).... Investment in infrastructure just makes major cities conducive for GROWING businesses....The STIMULUS hit every single aspect, but ONLY in the short term, Obama is pushing for the long term, but that requires gov't investing in the country, and that is what people see as "gov't wasting thier money" when really they are doing what is best for the population... or at least that is what ECONOMIST believe....but what do they know? AMIRIGHT?
NOW, to be fair, republicans do take a stance on increasing taxes, BUT there idea of raisng taxes is by "broadening the base" ie. taxes those that DON'T get taxed...YES it is true that 45% of Americans DON'T pay taxes, and republicans belive that this is the REAL "People not putting in their faire share", BUT like I said before, it is NOT these people HAVE wealth that CAN be taxed, but rather 75% of the nation's wealth is with ONLY 5% of the population, that DOES NOT create a strong economy for a "FREE MARKET" system
when you try to increase the amount of tax payers (ie make the people who don't pay taxes PAY taxes), those People that 'don't pay taxes' CAN'T for a reason, THEY HAVE NO MONEY to tax... Quick stats: ....Raise taxes on top Income Tax from 36% (NOW) TO 39% (3% increase) would genterate 700 BILLION Dollars...
...The bottom 50% (those that DON'T pay taxes) of our country have 2.5% (1.45 Trillion Dollars) in our nations wealth (total assets). SO if we were to take away HALF (tax 50% of it) of everything they own, it would equal 700 BILLION DOLLARS http://www.thedailyshow.com/watch/thu-august-18-2011/world-of-class-warfare---the-poor-s-free-ride-is-over
(part1, just need to see the last few mins to get caught up) http://www.thedailyshow.com/watch/thu-august-18-2011/world-of-class-warfare---warren-buffett-vs--wealthy-conservatives
SO if we were to tax the lower 50% (those that don't pay) say half of what they own in assets, it would be EQUAL to increase the high income tax by 3% (ie half of the bottom 50% of US citizen = 3% increase of the top 1% of citizen, ((700 Billion=700Billion))...so really "broadening the base" tax ideal is JUST unbalanced)
Posted by: matthens | July 18, 2012 7:09 PM
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Those who look to the 90's and ask how could the rates be higher and the economy so strong forget about the Peace Dividend that Clinton and the Republican House never speak about but that had more to do with the budget surpluses than the tax rates. Problem we have is a spending problem as much as it is a revenue problem. What are the numbers today, something on the order of 50% pay no taxes at all? We know more people went on SSI last month than got a new job. Also heard yesterday that something like 1% of people who go on SSI ever get off of it. We can tax the rich into the Stone Age but its not going to fix anything until we get our spending problems under control. There simply is not enough money that you can collect from the rich to make up the difference. Bottom line, there are too many able bodied people living off the government. All we need to do is to look at Greece or Spain or Portugal to see where we are headed.
By the way, I am fairly certain that E&Y is not a wing of the Republican Party and that the reputation of their brand is far more important than coming up with some report that benefits any particular point of view. Smarter to read it through with the understanding of who they are and what they are saying than to simply discount it because you don't like what it says. It's called common sense.
Posted by: dbonnette | July 18, 2012 1:42 PM
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History has not born out what biased report tries to convince people of.
Tax rates in the 90's were at these higher rates and our economy flourished. The country had record surpluses when Clinton left office. Then the tax cuts were put in place at a time when we get into multiple wars. Funding these wars in a low tax environment is what has drained our surpluses and created the record deficits. I remember recently reading the the United States is spending one billion dollars a week on funding the wars. I don't know if this is correct or not but it would not surprise me.
Also, people forget that even if we go back to 39.5% as being the highest tax bracket, we are still significantly lower than in prior years. I believe it was during Reagan's presidency that the maximum rate was lowered to 50%. People's memories are short when it is to their advantage.
I do think the $250,000 level for going back to the prior rate structure should be applied on a taxpayer by taxpayer basis. Our society has become one where most families are two wage earner households. Why shouldn't a married couple get the same benefit of $250,000 of lower rates each like two unmarried people that live together would get?
Posted by: tpratt | July 18, 2012 12:32 PM
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The is a report prepared by conservatives for conservatives.
The primary problem with the US economy is that there is not sufficient demand for products and services. As soon as demand increases additional employees will be hired to fulfill the additional demand. The job creators will be the consumers not the manufacturers sitting on the sideline. Additional employees will be hired and additional equipment will be put in service when demand warrants it, regardless of a slight increase in tax rates. The 1990's proved this.
Posted by: adam.nmn.roth@gmail.com | July 18, 2012 12:01 PM
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First of all, reports are statistics that we can make say anything we want. A question I have is... how is having lower tax rates an "expense" (spend was the word used) - from my knowledge of accounting and working in the field, lower income does not equate to an expense - wouldn't our clients love that!
One thing that people need to understand and perhaps where the report was going, is that big companies answer to investors. Investors demand a certain profit yield. If you increase taxes and increase it on those who invest, investors will demand more profit to offset the additional tax. A majority of investors are not going to want to get less profit for the same (or higher) risk. Thus, I presume E&Y lowered the job count by such an amount - hitting people who work for large corporations and retail giants. Do not forget, our corporations also need to compete with other countries, when people have limited funds and the product made in China is a lot cheaper than the USA made, most will choose the China product.
What a tax rate increase will do is further separate the middle class from the poor and the upper middle class from the rich. Those in lower middle class (who can barely sustain themselves) will end up in poverty because of reductions in hours, wages, increased goods and services costs, etc. Those who are under the 250K bracket that Obama choose but doing well will continue to do well and maybe even increase a little (creating a bigger distance between the poor and middle class). Those in middle class that are not ultra wealthy will have increased expenses and taxes with no good offsets and find themselves losing ground.
The last thing to understand, we are all working off of speculations (myself included) and we will not know for sure the outcome until something is concretely done. The question is, do we want to tempt it by increasing taxes on the wealthy and see what changes, if they go elsewhere or they just take it? If our wealthy start leaving the USA, more than they already are for other countries with better opportunities, we'll find we have high bills with little income to pay them with.
Posted by: Zeo | July 18, 2012 11:39 AM
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I found the comments to be more valuable than the article. If anyone bothered to get up early enough this morning to listen to an interview of the Treasury Secretary by a CNBC star I don't particularly care for (he's always right- just ask him), Tim did a pretty good job of blowing the E&Y report out of the water. One of the comments hit on it. What would happen if they did nothing, then later went back in for a tax cut? Tim's position is it would be much worse over the long haul.
The only way anything meaningful will happen that don't leave folks out in the street will be a Democratic landslide in November. I don't see that happening as the money being spent on the outright lies will keep people from having anything but a knee-jerk reaction. Emphasis on "jerk".
Even if the former governor wins and they gain the majority in both houses, unless they also have a 60 person majority in the Senate, it will be four more years of the same crap, only with the shoe on the other foot.
Posted by: topbeancounter | July 18, 2012 11:39 AM
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As with all General Equilibrium Models there usually is no real connection to actual economies. Under certain circumstances prices will indeed converge to equilibria, these assumptions have to include perfect rationality of individuals "Complete Information" regarding all prices now and in the future and the necessary conditions for "Perfect Competition".
The "Perfect Competition" economic theory cannot be used reliably. The United States has Oligopolies where markets and industry are dominated by a small number of sellers. Therefore these participants are large enough to have the market power to set the price of almost every product we buy. The conditions for "Perfect Competition" is very strict and there are only a few if any perfectly competitive markets to base these models on.
Ernest & Young gave almost 700,000.00 to the Republican Party during the last donation cycle for the firm. Almost twice as much as the Democrats. I think this fact would make things such as this report a bit more biased. Wouldn't you think so?
We need to quickly strengthen the Middle Class in this country. The time to change the way millionaire and billionaire individuals and corporations dictate policy is now. Tax the richest at the rate prior to John F. Kennedy and beak-up the megalith corporations to establish more even competition for the American companies who naturally keep their employment here.
Do this and we will all lead much richer lives. Thank you.
Posted by: finnyark | July 18, 2012 10:47 AM
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This report does not state how keeping the tax cuts on the higher earners equates to job growth. It didn't happen in the last decade so why would it happen this decade? This report and its supporters need to answer this question. They won't because they don't want to be held to any promises that might not be fulfilled.
Posted by: win2060 | July 18, 2012 9:50 AM
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"As a practicing CPA, I know that my clients are more worried about the demand rather than high rates. If they are making money they have no problem paying higher taxes." (above)
As a result of the tax code the top 10% have 75% of the wealth and 60% at the bottom are down to 3% - for a wealth gap which was last this bad just before the Great Depression (when unemployment was also as bad). Republicans want to avoid the kind of tax reform that followed the depression when rates were increased from 24% to: 63%, 79%, 81%, 88% and finally to 94% in 1944. We need tax reform that creates sustainable jobs through increased consumer demand. Regressive payroll taxes destroy jobs by adding 7 1/2% to the cost of each job and reducing the consumer spending power of each worker by 7 1/2%. Replacing payroll taxes with a 2% net wealth tax (excluding $15,000 cash and retirement funds) would quickly create millions of jobs through increased consumption. Income tax loopholes can be eliminated by lowering the rate to 8% (and eliminating capital gains and estate taxes). These changes will encourage maximum business investment and complement the healthy negative reinforcement ("use it or lose it") of the wealth tax. Completing the perfect tax reform plan would be a 4% value added tax (VAT) on business and an 8% corporate tax rate for the most competitive business rates in the world. Let us know at www.TaxNetWealth.com if you can identify a logical, legal or economic reason why this 2-4-8 Tax Blend would not produce a sustainable economic recovery as promised. Otherwise let your representatives in Washington know that the right tax reform can create jobs without government spending. Eugene Patrick Devany, JD, MPA
Posted by: Eugene Patrick Devany | July 18, 2012 9:31 AM
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As another CPA, most small business owners do not earn $ 250,000. I find it unfair that the "rich" get to increase their wealth under the current tax code while the "99%'er" find it hard to maintain their standard of living.
I'm also disappointed that the Health Care Law did not establish a single payer option like all the other industrial nations. My health insurance premium,co-pays and non-covered services nearly eats up over 25% of my firm's gross income each year.
Posted by: JeffCPA | July 18, 2012 9:20 AM
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The article talks about potential loss of 700,000 plus jobs. There are no details re how or why this would happen. I cannot figure out why in 1990s when the top marginal rate was 39.6%, millions of jobs were created whereas in last ten years when the rates were dropped, the job growth has become anemic. As a practicing CPA, I know that my clients are more worried about the demand rather than high rates. If they are making money they have no problem paying higher taxes.
Posted by: G Chokshi | July 18, 2012 7:58 AM
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