NCPA - National Center for Policy Analysis


July 23, 2010

The economic recovery is far from robust and socking it with one of the largest tax increases in history in January by letting the 2003 tax rates expire is not going to make anyone more eager to invest or create new jobs, says the Wall Street Journal.  

Democratic leaders say they want to preserve the lower rates on individuals making less than $200,000, but that still means raising them on the Americans most likely to take the risks that spur economic growth.  President Obama and Nancy Pelosi think they can play their usual class war card to justify raising taxes on the rich, but that's risky political business with unemployment at 9.5 percent.  Who do they think will create new jobs -- people making less than $200,000 a year, asks the Journal? 

  • The reality is that the increase in the top marginal income tax rate to higher than 41 percent will hit the most profitable small businesses especially hard.
  • That's because millions of business owners pay individual rates under Subchapter S of the tax code.
  • Today, this means they pay the same top rate as the Fortune 500: 35 percent.
  • But if the 2003 tax rates expire, they'll suddenly pay more than Goldman Sachs.  

According to new data from the Democratic-run Joint Committee on Taxation: 

  • In 2011 roughly 750,000 taxpayers with net business income will pay the highest marginal rate of 39.6 percent or the next highest bracket of 36 percent (up from 33 percent).
  • About half of the roughly $1 trillion of total net business income will also be reported on those returns. In a stroke, that will make tens of billions of dollars unavailable to invest or to hire new workers.  

As for the budget deficit, consider the new analysis by the Senate Republicans on the Finance Committee: 

  • Even if all the 2001 and 2003 tax cuts are made permanent, the share of national output that goes toward federal income taxes will in every year stay well above the post-World War II average of 8.2 percent.
  • Income tax receipts will rise gradually to 10 percent of gross domestic product (GDP), even with the current tax rates intact, because as the economy grows the progressive tax code takes a larger share.  

Source: Editorial, ''Liberal Tax Revolt; Some Democrats decide they prefer lower rates. Obama isn't one of them,'' Wall Street Journal, July 23, 2010. 

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