Which tax increases would hurt job growth the least?

The answer is easy: tax increases on the wealthiest households. This and other financial questions answered.

By , Guest blogger

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    Rep. Chris Van Hollen (D-MD) departs a super committee meeting in the Capitol in Washington November 18, 2011. Democrats and Republicans on a congressional "super committee" charged with trimming at least $1.2 trillion from the U.S. federal budget remain far apart on how much of that total should consist of tax increases and how much should come from trimming retirement and health benefits. Bernstein argues for more tax increases on the wealthy.
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That’s “you ask, I answer.”

I’ve been remiss in offering answers to many excellent questions folks have been posing in recent weeks, including this AM.  So let take (too) brief stabs at some of them (some questions are edited a touch):

Re the supercommittee, I wrote: given the automatic triggers, no deal is better than a bad deal, prompting this excellent question:

Recommended: 6 ways to make tax reform happen

Q: So just to be clear, you think the automatic triggers are a good thing? You would prefer that Congress not cancel them?  Even in the absence of tax increases, you support an across the board cut of $1.2 trillion in federal spending. What do you think this would do to unemployment?

A: Ah, you are expanding the choice set, in which case I’d make a very different set of choices.  I wouldn’t have had the crazy debt ceiling debate which ended with a process—supercommittee, sequestration—which I’ve called undemocratic.

But the Budget Control Act—the legislation enacted to resolve the debt ceiling debacle—mandated that the supercommittee either come up with a plan to reduce deficits by $1.5 trillion or automatic cuts of $1.2 trillion would ensue.  So that’s the choice on the table.  And yes, given that the trigger would lead to around $110 billion in cuts in 2013 (no cuts in 2012, which is good in terms of your macro concerns), and that the unemployment will still be too high then, I worry about that too.

But the plans on the table, as I’ve stressed, are more harmful to the economy, to programs I care about, and to the future budget process, than the automatic cuts.

If it were me, I’d have a supercommittee working around the clock on the deficit…I’d have numerous supercomittees.   But I’d have them working not on the budget deficit—I’d have them working on the jobs deficit.

Q: So if we must have deficit reduction, which spending cuts or tax increases would be the least harm in terms of growth and jobs?

A: Easy: tax increases on the wealthiest households.  Since they’re not, by definition, income constrained, raising their taxes will be have less impact on their spending and saving than tax increases on lower income families.  I’m not saying there’s no multiplier there, but it’s small compared to other options (see Table 11 here—it shows that the Bush tax cuts have among the smallest multipliers and that’s for all the cuts—just the highend cuts would be even smaller).

Which spending cuts would be least hurtful to jobs/growth?  Let me think about that one and get back to you.

Q: (In my tax reform liberation screed I argued that all income should be treated the same and taxed at progressive rates, i.e., no special rates for cap gains and dividends, which prompted this question.)

Are there any legitimate downsides to treating capital gains the same as say, personal income taxes?

A: First of all, not to be an annoying economist, but the way to think about this question—the way to think about every economic question—is “compared to what?”  That is, it’s not enough to ask about any downsides.  You have to ask about any downsides compared to the upsides you’d get from simplifying the code, not encouraging income shifting and other tricks by giving special treatment to certain types of income, collecting more revenue, closing a loophole, etc.

I think the weight of the evidence here is that the benefits of ending favoritism in the code re cap gains would outweigh any costs in terms of any investment disincentives.  I come to this view because I think (as does Warren Buffett–see next link) the historical record shows a very weak relationship between favoring capital gains and investment in productive capital (I go into some detail here).  So if the incentive is weak, ending it shouldn’t have much of a negative impact to net out of the benefits noted above.

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