Tax Reform and the American Jobs Act

Thursday, September 29, 2011 Print Email

Will $447 billion in new taxes help to create jobs, or kill them? While the administration is proposing that amount to pay for its new jobs plan, the Senate and House are attempting to answer the question in their respective hearings on tax reform.

The Senate Finance Committee on Wednesday held hearings examining the impact of marginal tax rates within the code. Testimony was evenly balanced between those who believe tax rates can be raised without damaging the economy, and those who believe any such rate rise would be a disaster.

Leonard Burman believes they can. Burman, the Daniel Patrick Moynihan Professor of Public Affairs at the Maxwell School of Syracuse University, suggested that moving the top rates back to where they were in the 1990s would not unduly diminish economic growth. And this might help build support for tax reform that would broaden the base and lower rates, he said.

In addition, Burman, who is also director of the Tax Policy Center at the Urban Institute, would allow capital gains and dividend rates to increase. Taxing capital gains at the same rate as other income would allow a cut in top income rates while maintaining the progressivity of the tax system, he said. Fully taxing dividends and using the increased revenue would allow a cut in corporate tax rates, and would address the concerns about multinationals moving headquarters and jobs overseas, he noted.

By contrast, Steven J. Entin, president and executive director of the Institute for Research on the Economics of Taxation, testified that higher marginal tax rates on any group, especially those already paying the highest rates, would reduce gross domestic product and income across the board, since the burden of higher taxes on capital formation falls largely on labor in the form of lower wages and hours worked. He noted that owners of pass-through businesses may report higher amounts of income on their returns than they actually take home, but that income is the money invested back into the business to purchase new equipment, pay the salary and benefits of workers, and meet day-to-day expenses.

Moreover, he concluded, increasing the double taxation of corporate income by raising tax rates on capital gains and dividends would dramatically reduce capital formation and wages, and would not raise the expected revenue.

Meanwhile, Dave Camp, chairman of the Committee on Ways and Means, announced a hearing next week to examine the economic models used by the Joint Committee on Taxation to analyze and score tax reform legislation. Camp said the hearing will focus on how the Joint Committee’s analysis can be used to measure accurately the impact of comprehensive reform on economic growth and job creation. It would be good to have the same analysis applied to the proposed American Jobs Act.

The act has been characterized as just another stimulus bill, a blue state bailout, and a payoff to unions. But since some of its projected revenue comes from tinkering with the sacred mortgage interest and charitable contribution deductions, it’s likely that the administration doesn’t really expect the proposal to pass. These revenue raisers have been tried before and rejected.

So why would they propose such a bill—could it be simply to paint those who oppose it as obstructionist and anti-jobs? We’ll know soon enough.

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