Domestic Taxes

Study: High-end tax increases would cost 700K jobs, reduce wages

“Long-run output can be expected to fall, and, depending on the use of the revenues, living standards, as reflected by workers‟ real after-tax wages, may also be lower.”

Top Republicans, including House GOP leaders and committee chairmen, jumped on the Tuesday report, as they continue to battle with President Obama and Democrats over how to proceed on tax issues and the broader fiscal cliff.

{mosads}Obama reiterated last week his plan to only extend the Bush-era rates for annual family incomes up to $250,000 for another year, a proposal many congressional Democrats have coalesced behind. Republicans on the Hill want to extend all current rates for a year.

The Ernst & Young study assumes that the top rate on income and dividends would rise to 39.6 percent, and that the capital gains rate would hit a maximum of 20 percent.

Obama has endorsed all of those proposals, though a Senate Democratic tax plan being circulated would put the top rate for dividends at 20 percent. The new study also takes into account new taxes on the wealthy included in the Democratic healthcare overhaul, including a new levy on investment income.

“Our economy is still struggling under President Obama’s policies, and his massive tax hike will only make things tougher,” House Speaker John Boehner (R-Ohio) said in a statement. “It’s one of the worst possible ideas at one of the worst possible times for families and small businesses.”

The report also comes as the two chambers are preparing to hold largely political votes on taxes, with final decisions on extending current rates expected to be pushed off until at least the post-election lame-duck session.

The House is scheduled vote on its plan to extend all current rates shortly before lawmakers leave for the August recess, something Boehner and Majority Leader Eric Cantor (R-Va.) both cited in their Tuesday statements responding to the Ernst & Young study.

Meanwhile, the Senate is likely to vote next week on the Democratic tax plan, as well as perhaps a GOP proposal that would continue all existing rates.

In making the case for his plan, the president has said that only around 3 percent of small businesses make above the $250,000 a year threshold, and that his plan would help the rest. Democrats have also long been making the case for a “balanced” approach to deficit reduction that requires new revenues from the wealthy.

“This isn’t about taxing job creators,” Obama said last week. “This is about helping job creators. I want to give them relief. I want to give those 97 percent a sense of permanence.”

Top Democrats also called into question the methodology used for the study, which was commissioned by groups that have historically backed extending all Bush-era rates.

For instance, Rep. Sandy Levin (Mich.), the ranking Democrat at the House Ways and Means Committee, said the study assumed that the revenue from the higher tax rates could be used to finance expanded government – instead of for deficit reduction, as the Obama administration has said.

“The study’s bias is obvious, its methodology is flawed and its purpose is clear: Republicans are seeking every opportunity to repeat a tired and discredited claim about small businesses in an effort to protect the highest earners from contributing toward deficit reduction,” Levin said in a statement.

But Republicans have countered that the Democrats plan would hit more than half of the income from so-called pass-through entities, which are businesses that pay taxes through the individual code, and not as a corporation.

According to the Ernst & Young study, more than 20 million workers are employed by pass-throughs that have more than 100 employees, and those businesses pay a significant chunk of business income taxes.  

This story was updated at 5:20 p.m.

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