10 Things Republicans Don't Want You to Know About the "Fiscal Cliff"
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And that, in a nutshell, is exactly what the nonpartisan Congressional Budget Office found last month.
In its report ("Economic Effects of Policies Contributing to Fiscal Tightening in 2013"), the CBO warned that the deficit-slashing effects of allowing the Bush tax cuts expire, ending the two-year payroll tax holiday and letting last year's budget sequestration deal proceed on January 1, 2013 could return the United States to recession. But as Dylan Matthews explained in the Washington Post, letting upper-income tax rates return to their slightly higher Clinton-era rates (as President Obama has proposed) will play no part in that austerity. While extending the Bush rates for all Americans carries a $330 billion overall price tag for Uncle Sam next year, the CBO calculated that $42 billion goes to the top taxpayers. But as the chart above shows, eliminating that Treasury-draining windfall for the wealthy (by raising rates for the top-two tax brackets, indexing the AMT and raising capital gains, dividend and estate taxes), would slice only 0.1% from economic growth next year.
Reviewing a recent study by Stanford's Nir Jaimovich and Northwestern's Sergio Rebelo, Matthews concluded, "There's definitely a point at which high tax rates for the rich hurt growth. But we're nowhere near there yet." (It is worth noting, as CBPP does and Republicans do not, that "a recent Treasury analysis finds that only 2.5 percent of small business owners fall into the top two income tax brackets and that these owners receive less than one-third of small business income.") All of which is why Republican strategist, Weekly Standard editor and Fox News regular Bill Kristol acknowledged last month:
"It won't kill the country if we raise taxes a little bit on millionaires," he said on "Fox News Sunday." "It really won't, I don't think. I don't really understand why Republicans don't take Obama's offer."
In his fiscal cliff proposal, President Obama has also called for letting capital gains tax rates return from 15 percent to their Clinton-era level of 20 percent. Dividends, currently taxed at the capital gains rate, would be treated as regular income. Conservative have opposed that step because, they claim, lower tax rates for capital gains than income earned through labor spur investment, catalyze economic growth and fuel job creation.
But if that Republican theology isn't true, then the United States has for decades done nothing more than deliver a massive windfall to the wealthiest Americans needing it least. Unfortunately, that's precisely what the data show. As it turns out, lower capital gains taxes increase income inequality - and not investment - in America.
As Paul Krugman recounted, the historically low capital gains rate enjoyed by the likes of Mitt Romney hasn't always been 15 percent. In the not-too-distant past, it reached 39.9 percent and before the Reagan tax reform of 1986 was the same as the top tax rate on income. But successive presidents of both parties lowered the capital gains rate on investment income because they believed, as the Washington Post recounted, "it spurs more investment in the U.S. economy, benefiting all Americans."
But as Jared Bernstein demonstrated with the chart below, there's no evidence to support that claim.
Bernstein found that that the business cycle, not acts of Congress, drive investment in the U.S.
Hard to see anything in the picture supporting the view that either the level or changes in cap gains taxes play a determinant role in investment decisions.
Remember, the ostensible reason for the favoritism in tax treatment here is to incentivize more investment and faster productivity growth. But that's not in the data and the reason it's not in the data is because investors aren't nearly as elastic to cap gains rates as their lobbyists say they are (more precisely, they'll carefully time their realizations to maximize their gains around rate changes, but that's not real economic activity-that's tax planning).