Simulating the Economic Effects of Obama's Tax Plan

November 5, 2012

As a follow-up to the Tax Foundation's recent assessment of the macroeconomic effects of Governor Mitt Romney's tax plan, Tax Foundation Senior Fellow Stephen Entin now turns his attention to measuring the macroeconomic effects of President Barack Obama's tax proposals.

Entin modeled the following elements of the president's individual income and estate tax proposals, as presented in his 2012 Budget documents, in the following manner:

  • Retain the Bush tax cuts for taxpayers in the bottom four tax brackets.
  • Increase the marginal tax rates in the top two tax brackets from 33 percent to 36 percent and from 35 percent to 39.6 percent.
  • Increase the capital gains top rate to 20 percent and let the tax rate on dividends revert to 39.6 percent for people in the top two brackets.
  • Restore the phase-outs of personal exemptions and itemized deductions for taxpayers with more than $250,000 in adjusted gross income (joint filers) and $200,000 (single filers).
  • Increase the federal estate tax from the current 35 percent top rate with a $5 million exempt amount to the 2009 levels of a 45 percent top rate and a $3.5 million exempt amount.

The simulation was run separately for each provision and for all provisions combined. Because of interactions, the separate effects do not necessarily add up to the total effect of all provisions.

The model results:

  • President Obama's tax plan would gradually reduce the level of gross domestic product (GDP) by nearly 3 percent, relative to the baseline projection, over five to 10 years.
  • Labor income would be lower by a similar amount, driven down by fewer hours worked and lower wages per hour.
  • The reduction in hours worked, about 0.75 percent, would be the equivalent of about a million jobs lost in today's economy, with those still employed earning roughly 2.28 percent lower wages.
  • Alternatively, one could view the result as losing four million jobs at unchanged pay levels.
  • The plan would also trim the capital stock by about 7.5 percent (or over $2 trillion in lost investment in plant, equipment and buildings, things that drive productivity, wages and hiring).

The study also measured the economic and distributional effects of President Obama's corporate tax plan and the tax changes contained in the Affordable Care Act beginning in 2013. The results found that these proposals would lower economic growth while substantially lowering workers' wages and incomes. Ultimately, President Obama's tax plans would be very harmful for the nation's long-term economic outlook.

Source: Stephen Entin, "Simulating the Economic Effects of Obama's Tax Plan," Tax Foundation, November 1, 2012.

 

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