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The High Cost of Tax Hikes

Posted by Heather Edwards on October 25, 2010

A recent Heritage Foundation report highlights the impending effects of an Obama Tax hike through an economic model created by the Center for Data Analysis, which estimates the potential economic and fiscal effects of a tax increase on the American economy from 2011 through 2020. This prototype estimates that inflation-adjusted GDP will fall by a total of 1.1 trillion over the projected period; and slower economic growth will result in less job creation, with an increasing number of jobs lost each year (in 2016 alone job losses would top 876,000). The model also predicts that business investment and personal savings will fall considerably each subsequent year, and that significant amounts of lost disposable income and reduced consumer spending will not result in increased government revenue.

The belief that only higher income earners will be affected is badly mistaken. In fact, higher income earners have greater control over creatively reducing their levels of taxable income. Nearly everyone will pay one way or another, whether through lower income or a rise in product costs. Around half of those subject to the tax increase will be small businesses, which in turn will directly and adversely affect job creation. These results are consistent with basic economics: where tax increases raise the price of capital and labor, economic activity will slow down.

Ultimately, a tax increase is misdirected policy, for the fundamental problem does not lie with revenue intake amounts, but rather with Congressional over-spending. As this paper argues, “Congress must come to terms with the need to find a new fiscal balance point through lower spending and fundamental entitlement reform that also supports strong economic growth.”

See here for the full report.

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