CBO Weighs in on Job Growth and Nixing Tax Cuts for Wealthy

November 8, 2012; Source: The Hill

Now that election coverage has been replaced by the drum beat of the impending “fiscal cliff,” we figure we ought to keep you abreast of some of the latest information in play, though it will undoubtedly be spun in a variety of ways in days to come. A report from the nonpartisan Congressional Budget Office (CBO) released Thursday calls into dispute claims about the devastation that would supposedly be caused by eliminating tax cuts only for the wealthy on grounds that they are the job creators. According to the CBO, the elimination of the tax cuts for only the wealthy would have a lesser effect on growth than has been suggested.

The CBO finds that while extending all Bush-era tax cuts past the end of the year would add or save 1.8 million jobs next year, eliminating tax cuts only for households making more than $250,000, as the White House has proposed, would save nearly as many at 1.6 million. This loss of 200,000 job growth as a result of letting tax cuts expire only for the wealthy is significantly less than has been estimated by many Republicans, who have been quoting a 700,000 figure drawn from an Ernst and Young report.

According to the report, as paraphrased by The Hill, “extending all the Bush-era rates and patching the Alternative Minimum Tax would help the economy expand by an additional 1.4 percent by the beginning of next year.” Patching the AMT but allowing only the top tax rates to rise would mean growth of 1.3 percent to the GDP, an “effect nearly as large,” the CBO reports, as continuing all of the Bush-era tax cuts. –Ruth McCambridge

About

Ruth McCambridge

Ruth is Editor in Chief of the Nonprofit Quarterly. Her background includes forty-five years of experience in nonprofits, primarily in organizations that mix grassroots community work with policy change. Beginning in the mid-1980s, Ruth spent a decade at the Boston Foundation, developing and implementing capacity building programs and advocating for grantmaking attention to constituent involvement.

  • Keith

    This is obviously written in the vein of “have the wealthy pay their fair share”. I have never agreed with the premise that eliminating some tax cuts will damage job creation. However, if you want to consider potentially serious impact on donations to non-profits, which you discuss frequently, consider this if we hit 2013 without any action on the tax laws:

    1. The top tax rate goes from 35% to 39.6%, an increase of 4.6%
    2. Tax rates on qualified dividends goes from 15% to ordinary income tax rates, or 39.6% for the top bracket, an increase of 24.6%!
    3. Taxes on capital gains goes from 15% to 20%, an increase of 5%.
    4. A new 3.8% surtax on investment income for Obamacare, an increase of 3.8%.

    Forgetting number 3, in case someone took no capital gains, a top tier income bracket individual who may have significant income from dividends (such as many retirees), will see a tax hike of 28.4% on dividend/investment income (#2 & 4 combined) and a 4.6% increase on total income, other than tax-exempt income. Add an additional 5% hike if he happens to take capital gains.

    These numbers are not insignificant, and I doubt that many would suggest that these are asking the rich “to pay a little more”, in the words of the President. To someone living largely on dividend income, you are talking about a tax increase on the order of 30%. Do you suppose that might have a dampening effect on charitable donations, especially if Congress decides to close the “loophole” of tax deductions for donations? Not to mention the estate tax exclusion dropping from $5.12 million to $1.0 million, while estate tax rates will rise to 55% (top bracket) from the current 35%.

    I may be wrong on the numbers – someone will correct me if I am – but my organization is just launching a capital campaign, and unless Congress acts before Dec. 31, I think there are going to be major difficulties raising large sums from wealthy donors.

  • Lisa Deutsch Harrigan

    To the person above me – You claim that the Additional Taxes will stop people from donating. Well, my friends who do make that kind of money AND get some of it from Dividends and sales of stock – hint, I live in the Silicon Valley – have told me, they can afford the additional tax hits without it affecting their Way of Life. If anything, they will donate MORE because it is a Tax Write-Off, and write-offs are good, reducing their Income.
    They do remind me that asking for a donation of Appreciated Stock is an excellent way to get them to donate more, since that is going to be an Even Better Choice after they lose that tax break.
    That is how the Wealthy who love to donate to Non-Profits think.
    The cheapskates you are writing about are the ones who penny pinch everything in their lives. They will never fit through that needle. Marley and Old Scrooge will be proud of them.

  • Keith

    There is a BIG difference between people making millions, or tens of millions, per year – hedge fund managers, top level Wall Steeters and CEO’s, and your Silicon Valley friends, and those making $300,000, say. If you take 1/3 of the dividend income from the former, they still have millions to live on and make donations – and I agree with you, it will not change their lifestyle. Taking 1/3 of $300,000 could dramatically affect that person. They might have been very generous donors previously, but will certainly feel poorer, even if you and many others feel they are enormously wealthy. I am very familiar with making stock donations, and encourage others to do it. However, even Romney talked about limiting tax deductions on charitable donations. As we approach the fiscal cliff, and hear the leaders posture ahead of negotiations, it would not surprise me to see them limit donations. You can argue otherwise, but I feel that would negatively impact donations.

  • michael

    Keith, you’re _understating_ the largess of the tax increase.

    1) Taking the top marginal rate from 35 to 39.6 is an effective 13% tax crease
    2) Taxing dividends like regular income is a tax hike of 164%!
    3) The capital gains increase is 33%
    4) Layered on top of this is the 3.8% ObamaCare tax.

    For someone at the $250,000 level, depending upon their income mix they could easily be paying $25-30,000 in taxes. Yes, this is going to seriously impact capital campaigns

  • Michael Wyland

    CBO is a nonpartisan organization, but that doesn’t mean that it’s free of bias.

    Most of the time, the bias is “baked into” the CBO analyses by the Senators or Members of Congress requesting the reports. For example, long after the GOP talked of “dynamic scoring,” or the assertion that reducing tax rates increases tax revenues by encouraging more taxable economic activity, the CBO did no analyses which attempted to include dynamic scoring. Many CBO analyses exist which document no net economic effect of changing tax rates. The orthodoxy was/is that raising rates increases revenues and decreasing rates reduces revenues, regardless of Treasury/IRS data to the contrary.

    There was also a recent example of CBO researchers getting a little ahead of Congress in seeming to outline a policy position rather than merely perform an analysis. Senior CBO officials were quoted in the news as walking the line between defending their research and, simultaneously, sending the message that the research and researcher in question would be reviewed and an “updated” report would be issued.

  • Michael Wyland

    Romney came up with an interesting idea for increasing tax payments form the wealthy without changing rates. He suggested that a taxpayer’s total *deductions* be limited/capped at a set amount or rate. So, regardless of whether the deductions are for capital gains, charitable gifts, home mortgage interest, investment losses, etc., their aggregate total would be limited.

    Of course, this would have to be indexed for inflation in some way to avoid the alternative minimum tax (AMT) trap we’ve been in for many years. AMT was designed decades ago to catch revenue from a few of the superwealthy who were able to shelter income when the top tax rate was 70%. In the decades since, the affluent now have incomes that were defined as superwealthy in the 1960s and early 1970s. Add in decreasing tax rates since the 1970s, and the present situation results in upper middle-class atxpayers potentiall y subject to a *higher* tax rate as a result of being subject to the AMT. Congress has to adopt AMT fixes regularly to stop the statute from hitting too many taxpayers. This periodic intervention is not unlike the annual Congressional moves to stop decreasing Medicare payments to providers – known as “doc fix”.