U.S. Representative John Boehner
Obama Tax Hike threatens jobs
Ernst & Young Study: President Obama’s Small Business Tax Hike Threatens More Than 700,000 Jobs 

WASHINGTON, D.C. – Congressman Boehner (R-West Chester) released the following statement today regarding a new study by independent accounting firm Ernst & Young that shows President Obama’s small business tax hike will destroy more than 700,000 American jobs: 

“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. 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. 

“That’s why 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 jobs. If Democrats want to keep threatening to raise taxes and risk tanking our already-weak economy, the American people will hold them accountable.” 

NOTE: The Ernst & Young study found unemployment would increase by .5 percent – or roughly 710,000 jobs – if the president’s small business tax hike is imposed. 

Below, the executive summary of the Ernst & Young study. Click the link at the end for the full report. 

Ernst & Young: Executive Summary 

The confluence of fiscal policy changes scheduled to occur at the end of 2012 – sometimes referred to as the “fiscal cliff” – poses serious challenges for policy makers. One area of disagreement is the increase in tax rates for high-income taxpayers resulting in part due to the sunset of elements of the 2001 and 2003 tax cuts. President Obama has called for the reinstatement of the higher top tax rates in his budget submission to the Congress, while key Republican members of Congress have called for their extension. The increase in the Medicare tax and its expansion to unearned income for high-income earners under the Patient Protection and Affordable Care Act of 2010 (PPACA) further contributes to the increase in top tax rates. 

The concern over the top individual tax rates has been a focus, in part, because of the prominent role played by flow-through businesses – S corporations, partnerships, limited liability companies, and sole proprietorships – in the US economy and the large fraction of flow-through income that is subject to the top two individual income tax rates. These businesses employ 54% of the private sector work force and pay 44% of federal business income taxes.1 The number of workers employed by large flow-through businesses is also significant: more than 20 million workers are employed by flow-through businesses with more than 100 employees. 

This report uses the EY General Equilibrium Model of the US Economy to examine the impact of the increase in the top tax rates in the long-run. While a recent Congressional Budget Office (CBO) report examined the near-term effects of all of the federal government fiscal policies under scrutiny at the end of 2012 and found them to be of sufficient size to push the economy into recession at the beginning of 2013, this report focuses on the long-run effects of the increase in the top tax rates. This report examines four sets of provisions that will increase the top tax rates: 

The increase in the top two tax rates from 33% to 36% and 35% to 39.6%. 

The reinstatement of the limitation on itemized deductions for high-income taxpayers (the “Pease” provision). 

The taxation of dividends as ordinary income and at a top income tax rate of 39.6% and increase in the top tax rate applied to capital gains to 20%. 

The increase in the 2.9% Medicare tax to 3.8% 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. 

With the combination of these tax changes at the beginning of 2013 the top tax rate on ordinary income will rise from 35% in 2012 to 40.9%, the top tax rate on dividends will rise from 15% to 44.7% and the top tax rate on capital gains will rise from 15% to 24.7%. 

These higher tax rates result in a significant increase in the average marginal tax rates (AMTR) on business, wage, and investment income, as well as the marginal effective tax rate (METR) on new business investment. This report finds that the AMTR increases significantly for wages (5.0%), flow-through business income (6.4%), interest (16.5%), dividends (157.1%) and capital gains (39.3%). The METR on new business investment increases by 15.8% for the corporate sector and 15.6% for flow-through businesses. 

This report finds that these higher marginal tax rates result in a smaller economy, fewer jobs, less investment, and lower wages. Specifically, this report finds that the higher tax rates will have significant adverse economic effects in the long-run: lowering output, employment, investment, the capital stock, and real after-tax wages when the resulting revenue is used to finance additional government spending. 

Long-run macroeconomic impact of increasing tax rates on high-income taxpayers in 2013 

Through lower after-tax rewards to work, the higher tax rates on wages reduce work effort and labor force participation. The higher tax rates on capital gains and dividend increase the cost of equity capital, which discourages savings and reduces investment. Capital investment falls, which reduces labor productivity and means lower output and living standards in the long-run. 

Output in the long-run would fall by 1.3%, or $200 billion, in today’s economy. 

Employment in the long-run would fall by 0.5% or, roughly 710,000 fewer jobs, in today’s economy. 

Capital stock and investment in the long-run would fall by 1.4% and 2.4%, respectively. 

Real after-tax wages would fall by 1.8%, reflecting a decline in workers’ living standards relative to what would have occurred otherwise. 

These results suggest real long-run economic consequences for allowing the top two ordinary tax rates and investment tax rates to rise in 2013. This policy path can be expected to reduce long-run output, investment and net worth. 

To read the complete study in downloadable pdf format, click here