Studies Examine Effect Of Tax Increase On Wealthy

Republicans claim President Obama's plan to raise taxes on the wealthy will cost the economy 700,000 jobs. Another study from the Congressional Budget Office puts the number of lost jobs as 200,000. But both studies also assume millions of new jobs will be created.

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Elsewhere in today's program, we've heard of President Obama's demand that the wealthy pay higher taxes. President Bush's tax cuts, you'll recall, expire at the end of the year, and tax rates for the wealthy would rise several percentage points, to 1990's levels. In fact, everybody's taxes would go up if nothing is done. Republicans counter that raising taxes on the wealthy would cost the economy 700,000 jobs. So let's look at the data they used to support that claim. NPR's John Ydstie reports.

JOHN YDSTIE, BYLINE: Mitt Romney raised the specter of 700,000 lost jobs during his first debate with President Obama in Denver.

(SOUNDBITE OF PRESIDENTIAL DEBATE)

MITT ROMNEY: Your plan is to take the tax rate on successful small businesses from 35 percent to 40 percent. The National Federation of Independent Businesses has said that will cost 700,000 jobs.

YDSTIE: The day after President Obama won the election, House Speaker John Boehner made the same claim.

(SOUNDBITE OF SPEECH)

REPRESENTATIVE JOHN BOEHNER: The Congressional Budget Office released a report showing that the most harmful consequences of the fiscal cliff come from increasing tax rates. According to Ernst and Young, raising the top rates would destroy nearly 700,000 jobs in our country.

YDSTIE: While Speaker Boehner cites the Congressional Budget Office in making his case, he neglects to say that a couple of CBO reports last week came to a very different conclusion about the potential job losses from raising taxes on the rich.

MARK HOPKINS: Our view is that CBO is probably a more reliable estimate.

YDSTIE: That's Mark Hopkins, a senior economist at Moody's Analytics. Hopkins points out that the CBO says that in the short term, raising taxes on the wealthy would cost about 200,000. The jobs would be lost quickly in 2013, but the CBO says they'd likely be regained relatively quickly over the next few years.

HOPKINS: They also do a longer-run study, where they take account the positive effect of deficit reduction and savings that that would bring and the pro-growth effects of smaller deficits.

YDSTIE: And while the CBO is a nonpartisan organization, the Ernst and Young study cited by Republicans was financed by opponents of the president's proposal, including the U.S. Chamber of Commerce and the National Federation of Independent Businesses. The Ernst and Young study finds that over the long term, the economy will produce 710,000 fewer jobs as the higher taxes dampen job creation.

That sounds like a lot, but it is a relatively small portion of the over 12 million jobs that the economy is expected to add over the next 10 years. The Ernst and Young study also has a significant shortcoming. It assumes that none of the added tax revenue collected from the wealthy will go to deficit reduction, even though that's the main reason the president is calling for the tax hike. Instead, says Mark Hopkins, it assumes that the added revenue will simply be spent by the government.

HOPKINS: It's an incomplete picture, and I think that the result is that it tends to skew the results a little bit too negatively in terms of the impact in the long run.

YDSTIE: The CBO has made a calculation weighing the negative effects of higher tax rates on the wealthy against the benefits of lower deficits. It concludes that in the long run, the benefits of lower deficits would outweigh the negatives of higher taxes, and the net impact on the nation's long term output and income would probably be positive. John Ydstie, NPR News, Washington.

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