“In short, tax increases appear to have a very large, sustained and highly significant negative impact on output… the more intuitive way to express this result is that tax cuts have very large and persistent positive output effects.”
— Christina Romer and David Romer, “The Macroeconomic Effects of Tax Changes,” American Economics Review June 2010
On January 1, 2010 Americans could see the largest tax increase in the history of our nation—$3.8 trillion over ten years. Every single tax bracket would be increased, child tax credits would be slashed and the estate tax would return in full force, if Congress does not act.
This tax hike will affect every American individual and business. Most in Congress agree that we shouldn’t sit by idly and let the economy grind to a halt, but there is sharp disagreement about whether some Americans should have to pay more next year.
Treasury Secretary Timothy Geithner recently said that the American economy could “withstand” tax increases supported by the Obama administration. In the country’s deepest recession in decades, I don’t think tax policy should be about what we can withstand. It should be about what can actually grow our economy.
That’s where Dr. Christina Romer comes in. Dr. Romer is the Chair of the President’s Council of Economic Advisers. The quotation above is taken from a recently published paper that she and her husband, also an economist, co-wrote.
They conclude that tax increases reduce economic output. Economic output has a direct relationship with employment, because it is profitable businesses who typically hire new workers.
Secretary Geithner and President Obama contend that it is no big deal to raise taxes on those that they call “rich.” Unfortunately, their caricature of the rich is not based in reality. Americans in the top tax bracket are not uniformly Hollywood celebrities and sports stars.
According to the non-partisan Congressional Joint Committee on Taxation, 50 percent of those in the top individual tax bracket are small business owners. A survey by the National Foundation of Independent Business found that 75 percent of their members are organized in a way that they pay taxes at the individual rate.
President Obama claims that his tax increase will not affect small businesses currently struggling through the recession. That may be true, but it is not struggling businesses that hire new workers. Hurting successful small businesses that are turning a profit means taking away resources from the very businesses that are most likely to hire new workers.
But small businesses aren’t just imperiled by the impending increase in the marginal rates. On January 1, the estate tax will increase to 55 percent for estates valued at more than $1 million. The value of an estate is not just how much cash is in the bank. Business assets and property are included. They are asset rich and cash poor.
The family of the deceased must find a way to pay the tax bill, and if they don’t have the cash they must sell assets. In my district in southeastern Pennsylvania, farmers are especially vulnerable to the estate tax. Many are eking out a living farming land that is worth millions to developers.
Farmers aren’t the only ones affected. For instance, your local printer may be making only a slim profit, but the presses may be worth hundreds of thousands of dollars. When the farmer or the printer passes away, their heirs would have to sell the land or the presses to pay the bill. Without land or equipment, the business shuts down and employees lose their jobs.
Over the next few months, the Obama administration will try to paint a picture of those in the top tax bracket and subject to the estate tax as wealthy and wasteful. On the contrary, most of these individuals are job creators, risking their own money to start new American businesses.
When the tax increases come, it won’t mean that these individuals will buy one fewer yacht, hold off on the purchase of a new luxury car or sell their beach house. It will mean that they will hire one fewer worker, that they will hold off on purchasing new computer equipment or that they will reconsider investing in a new business venture. With 9.5 percent unemployment, we can’t “withstand” the status quo.
Rep. Joe Pitts (R) represents Pennsylvania’s 16th District in the U.S. House of Representatives.