How States Would Be Affected by Obama's Proposed Tax Increases on High Income Earners

October 29, 2012

When investigating the effect of taxes, one should take a holistic view of its effect on the economy.  Rather than pretending that the damage of tax increases is limited to "rich" people, it makes sense to look at overall economic effects, either nationally or within each state, says William McBride of the Tax Foundation.

Even taking a simplistic view, taxes on the "exclusive high-income" group will have a resonating effect throughout the economy.

  • When high-income families are hit with additional taxes, they don't keep it to themselves. They reduce spending on goods and services, hurting the local businesses that provide those things.
  • This results in less hiring and investment by those businesses and ultimately less income flows through the whole community.
  • Moreover, productivity also decreases, as the workers in these businesses reduce their work, since they get paid less for it after taxes.
  • High-income taxpayers respond to tax hikes by saving and investing less of their income, since they keep less of the returns after taxes on capital gains and dividends.

Small to medium size enterprises would be directly affected by the president's initiatives to raise taxes because a majority of such businesses file under the individual tax code.

  • Informally termed "pass-through businesses," it consists of partnerships, corporations and sole proprietors.
  • This diverse group earns more income and employs more workers than traditional large scale corporations.
  • Most pass-through businesses are reported by taxpayers earning more than $250,000 -- around 66 percent.
  • Thus, significant impairment can be done to the economy by raising personal income tax rates because it will disproportionately impact this group.

The impact following the expiration of the Bush tax cuts -- and the unfolding of Obama's push to raise taxes -- will be experienced differently in each state. The states affected the most over the 10 year period are:

  • California stands to lose $241 billion.
  • New York: $186 billion.
  • Texas: $121 billion.
  • Florida: $104 billion.
  • Illinois: $74 billion.

Source: William McBride, "How States would be Affected by Obama's Proposed Tax Increases on High-Income Earners," Tax Foundation, October 25, 2012.

 

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