The President and his advocates in Congress argue that raising taxes on all taxpayers would damage the economy but that raising taxes on only “high-income” households is supposedly not economically destructive. This line of reasoning is simply mistaken.
(House Speaker John Boehner (R–OH), perhaps still cognizant of the economic ramifications of raising taxes on anyone in the current economy, has now opened the door to at least raising tax rates on households earning $1 million or more per year.)
Higher tax rates on investment and ordinary income, at either the Speaker’s rates or the President’s, would undermine long-term economic growth.
A study by The Heritage Foundation’s Center for Data Analysis indicates that the President’s plan to raise tax rates on “high-income earners” would reduce total economic output in the economy by an average $196 billion per year. The slowdown in the economy would lower gross private-sector investment by $126 billion (4.1 percent) per year, shrink the real capital stock in the U.S. economy by an average $229 billion (1.2 percent) per year, and lead to 1.1 million fewer private-sector jobs.
When accounting for the reduced economic output and smaller personal and corporate income tax bases, the study shows that the President’s tax plan would generate about $680 billion in federal tax revenue over 10 years. This is significantly less than the $1.6 trillion assumed by the President, and it falls short principally because the President assumes that his tax plan would have no effect on the economy.
The offer by the President and his allies avoids the real fiscal problem: high levels of spending driven ever higher by broken federal programs. We cannot solve the long-run fiscal imbalance with tax increases, especially when tax rate increases would leave theU.S.economy weaker and federal revenues lower than assumed under static forecasts.
The best path forward is to achieve fiscal balance by implementing pro-growth, revenue-neutral, fundamental reform to theU.S.tax code and by setting federal discretionary and mandatory spending on a significantly slower trajectory. Remember, we reached the fiscal cliff through spending excesses, and the first step back from the edge is implementing spending reforms.