When taxes rise, economy suffers

February 22, 2011 • Editorial

President Barack Obama is betting his 2012 budget on relatively high economic growth rates over the next several years — but the higher tax rates he’s asking for would work against the expansion that the budget is counting on to help cut the federal deficit.

The president has promised a major tax overhaul, and goodness knows one is overdue, but the 2012 budget merely ratchets up tax rates on business and higher income earners.

The record of such tax hikes is that all of the anticipated revenue rarely materializes because of their negative impact on growth. The proposal suggests that the economy will grow by close to 3.9 percent per year from [auth] 2013 through 2016. But the budget also includes capital gains and dividend rate hikes in 2013 to 20 percent from 15 percent.

Top bracket income taxpayers would see their tax rate increase to more than 39 percent from 35 percent. In addition, high-income earners would lose portions of their deductions for mortgage interest, state taxes and donations to charity.

The Wall Street Journal, in its analysis of the budget proposals, reports that banks over the next decade would see their taxes increase by $33 billion; corporations and investment firms would face $138 billion higher taxes through various changes in the tax code and petroleum and coal companies would see their tax liabilities increase by $46 billion.

Multinational corporations would pay another $129 billion in taxes during the 10- year period. In all, the Journal calculates, each spending cut of $1 over the next decade is matched by $1 in tax hikes in this budget. With a GOP-controlled House, the full menu of tax hikes is unlikely to happen.

But the proposal sets up a running fight between the president, Senate Democrats and House Republicans over taxes, when the real issue should be slowing spending and reforming the corporate income tax. And it sends a message to the business community that despite recent overtures from the White House, it still faces a hostile environment in many parts of the nation’s capital.

That will inhibit investment, and slow the kind of growth that creates jobs. If higher personal income taxes for upper bracket payers are part of some budget compromise, for example, there will be fewer jobs at small firms. Higher bank taxes and taxes on capital gains and dividends would slow loans and investment. And money would be directed to various tax shelters.

Given the softness of the economy and the still-high unemployment rate, is this really the kind of fight the president and members of the House should be having? It may well be, as the president has suggested, that there should be some kind of business tax overhaul in which tax credits could be jettisoned for a more evenly applied corporate business tax with a lower rate.

That kind of tax talk, and much more vigorous spending cuts, is what’s needed to spur the economy — not the list of tax hikes included in this budget.

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One Response to When taxes rise, economy suffers

  1. Donnahamill says:

    Remember who caused this mess we are in! Tax wall street , not main street.

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