How Would the End of the Bush Tax Cuts for the Rich Affect Jobs?

There have been a lot of contradictory statements coming from Washington these days about how employment levels would be affected by President Obama’s proposal to allow the expiration of the Bush-era income tax rate reductions for the top two income tax brackets (only affecting income in excess of $250,000 for couples and $200,000 for singles). Republican House Speaker John Boehner continues to cite a discredited report claiming that 700,000 jobs will be lost, while several media outlets have recently reported that the Congressional Budget Office (CBO) found 200,000 jobs would be lost. Neither is right.

This is one of the confusing aspects of the debate over the so-called “fiscal cliff,” the term sometimes used to describe the point at which the Bush tax cuts are scheduled to expire, and some spending cuts are scheduled to take effect, at the end of this year.  

Boehner’s Bogus 700,000 Jobs Claim

Let’s start with the most outrageous claim — that of Speaker Boehner. Last week, we explained why his call to pursue tax reform along the model of the Tax Reform Act of 1986 was both disingenuous and not up to the task of addressing our current budget situation. During the same speech, Boehner mentioned an Ernst & Young report finding that “going over part of the ‘fiscal cliff’ and raising taxes on the top two rates would cost our economy more than 700,000 jobs.”

Citizens for Tax Justice explained, back in July, why the study Boehner cites (which was paid for by groups like the U.S. Chamber of Commerce and the National Federation of Independent Businesses) is bogus. To take just one example of the problems with the report, it assumes a labor supply response (the degree to which people work fewer hours in response to higher tax rates) that is nearly 10 times stronger than the non-partisan CBO assumes when it makes similar estimates on labor supply effects.

CBO’s Misunderstood 200,000 Jobs Figure

The most recent CBO estimates, which are claimed to show a potential loss of 200,000 jobs, are another story. One problem is that the CBO study examines the impact of delaying, for two years, the expiration of the Bush tax cuts (and some reductions in spending) which will occur under current law. One of CBO’s findings is that extending the income tax rate reductions for the top two tax brackets (the tax cuts for the rich that Obama would like to see expire) for two years will result in 200,000 more jobs than would exist if Congress allowed these tax cuts to expire.

But if Congress decides to delay the expiration of the Bush tax cuts for the rich for two years (or any amount of time), chances are extremely high that this delay will eventually become permanent rather than temporary. If President Obama caves to Republican demands to extend tax cuts for the rich now, when he seems to have a mandate from the voters to let them expire, why in the world would he do any better in the years to come?

And, permanently extending the Bush tax cuts for the rich, as Republican Congressional leaders ultimately want, would have negative long-term impacts because it would substantially increase the budget deficit and make it more difficult to make the investments that create jobs.

This is demonstrated by other CBO studies that examine the long-term impact of removing all the impacts of the so-called “fiscal cliff” permanently. A CBO report from August shows (in a table on page 37) that removing all the fiscal cliff impacts (by making the Bush tax cuts permanent and canceling the scheduled spending cuts) would reduce economic output (and thus jobs) by 2022. Gross domestic product would be down 0.4 percent and gross national product would be down 1.7 percent, compared to what would happen if Congress did nothing and simply allowed the fiscal cliff impacts to take effect. (And remember, two-thirds of the fiscal cliff’s impact on deficit reduction results from the expiration of tax cuts, rather than then spending cuts scheduled to take effect.)

Of course, the short-term does matter — we need to improve the economy right now! But even if we could be persuaded that extending the income tax cuts for income in excess of $250,000 could save 200,000 jobs in the short-term, we could think of many, many, more cost-effective ways to do this. The figures in the new CBO report show (in a table on page 7) that the cost difference between extending all the Bush tax cuts and extending all but the income tax cuts for the top two brackets would be $42 billion in 2013. Divided by 200,000, that comes to $210,000 per job saved.

In other words, CBO thinks we can save a job for every $210,000 that we give to people who make over $250,000 (or $200,000 for single taxpayers). We’re not sure how much it costs annually to help public schools hire back teachers laid off due to budget cuts, or to hire construction workers to build bridges, but we’re pretty sure it’s less than $210,000 each.

Actually, the same CBO report also shows that the cost of calling off the automatic cuts in defense and non-defense spending and the scheduled expiration of increased doctor payments from Medicare would be $64 billion by the end of 2013 and would make a difference of 800,000 jobs. Divide $64 billion by 800,000 and that comes to $80,000 per job saved. That sounds like a much better deal.

Enact Obama’s Proposal or Go Off the Fiscal Cliff

The biggest issue facing Congress right now is finding revenue to make the public investments that will help our economy and to reduce the deficit. Extending most of the Bush tax cuts, as President Obama proposes, is not a great way to achieve that, but it makes sense to enact Obama’s approach for one year to give lawmakers time to find better solutions. If anti-tax lawmakers block that approach and insist on enacting all the tax cuts, then Congress and the President should simply allow all the tax cuts to expire.