Individual tax rates would increase, meaning small businesses – the engines of job creation in an economic recovery – would take a huge hit at the time we need them most.
In fact, the mere possibility of such massive tax hikes and spending cuts is already hampering economic growth. The Department of Commerce’s latest estimate shows that the economy grew a lackluster 2 percent last quarter, with business capital investment falling by 1.3 percent (compared to a 3.6 percent increase in the second quarter). The NAM report found that the looming fiscal cliff has already reduced GDP growth this year by 0.6 percent.
Businesses see the tax threat on the horizon, and it is restraining their willingness to invest.
The magnitude of what could happen to our country if we were to actually go over this cliff cannot be overstated. Every American who pays income taxes would be hit with an increase. Taxes on capital gains and dividends would ratchet up by 59 percent and 189 percent respectively, delivering a blow to American companies that create jobs and to the millions of Americans who rely on investment income for their retirement. The death tax would also skyrocket from its current rate of 35 percent to 55 percent, burdening more than 51,000 additional estates with double taxation, including many family-owned farms and businesses that would have to be sold to pay the tax. Several new tax increases from ObamaCare (e.g. those on investment income and medical devices) would also kick in.
Given these dire consequences, Congress and the president must work together during the lame-duck session to prevent our country from going over this cliff. How to get it done? First, the 2001 and 2003 tax relief must be immediately extended for as long as possible. Second, the across-the-board cuts must be replaced with responsible, alternative spending reductions that won’t cripple our national-security capabilities. The House has already passed legislation to accomplish both of these goals, and Senate Democrats should follow suit.
Once the fiscal cliff has been successfully averted, then a focus on tax reform would be in order. To do that most effectively, it’s imperative that Congress lower rates for both corporations and small businesses; simply cutting the corporate-tax rate would not help the 95 percent of American businesses that file their taxes as individuals. Moreover, if we cut the corporate rate but raise the top individual rates, as President Obama has suggested, we would effectively cut taxes on corporations but raise them on small businesses. That doesn’t make economic sense. Pro-growth tax reform must provide relief to job creators of all shapes and sizes.
We must also remember that raising tax rates is not a solution to our debt woes. History has demonstrated that the most effective way to boost tax revenue is not to raise tax rates but to lower rates and broaden the base of taxable revenues by reducing the amount of deductions, credits, and exemptions.
Attempting to solve our long-term fiscal problems with higher tax rates ignores the fact that the main driver of our debt is entitlement spending. This approach would also crush economic growth when we need it most.
Those interested in reducing the debt should pick their partners wisely. Economic growth is the key to debt reduction. The higher marginal income tax rates that Democrats favor would slow growth and make a robust recovery that much more difficult to achieve.
A pro-growth solution to our debt problem is long overdue, but, before members of Congress can work toward that goal, Washington must first avert the threat of the fiscal cliff.
Kyl is the Republican Whip and a member of the Senate Finance Committee. He is retiring at the end of his current term in January.