As Predicted, 2013 Tax Hikes on Rich Didn't Hurt Jobs, Economic Growth
The last days of 2015 brought some very interesting news about America's record-high income inequality. On December 29, Noam Schieber and Patricia Cohen of the New York Times revealed a "private tax system" that saves the wealthiest billions every year. In conjunction with the Bush cuts to income and investment income tax rates, between 1995 and 2012 the effective tax rate for the 400 highest earned plummeted from 27 to just 17 percent. But as Josh Barro, Jim Tankersley and Josh Zumbrun reported the very next day, thanks to the upper-income tax hikes passed as part of the so-called "fiscal cliff" deal, the rate for those richest 400 Americans jumped to 23 percent in 2013.
But what didn't happen starting in 2013 is even more important than what did. Despite Republican cries of "job-killing" tax increases on "job creators," the U.S. economy continued to expand and add workers without interruption. As it turns out, that is precisely what the Obama administration, Democrats on Capitol Hill and the nonpartisan Congressional Budget Office predicted.
As you'll recall, then Senator Obama campaigned for the White House pledging to reverse the Bush tax cuts of 2001 and 2003 for households earning over $250,000 a year. But with the economy devastated by the steep recession which began in late 2007, any tax hikes had to wait. Instead, Obama delivered the largest two-year tax cut with the 2009 stimulus package, and enacted a two-year, two percent payroll tax reduction for 2011 and 2012. But as 2013 approached, the U.S. faced the so-called "fiscal cliff," a triple whammy for the economy in which the Bush tax cuts and the payroll tax cuts for all taxpayers would expire even as the sequestration process slashed federal spending. And as I noted in November 2012, the CBO warned those developments--or almost of all of those developments--would be incredibly damaging to the American economy:
In its report ("Economic Effects of Policies Contributing to Fiscal Tightening in 2013"), the CBO warned that the deficit-slashing effects of allowing the Bush tax cuts expire, ending the two-year payroll tax holiday and letting last year's budget sequestration deal proceed on January 1, 2013 could return the United States to recession. The combination of spending cuts and tax increases could reduce gross domestic product by 2.9 percent and drive the unemployment rate from 7.9 percent today to 9.1 percent by the end of next year.
But as Dylan Matthews explained in the Washington Post, letting upper-income tax rates return to their slightly higher Clinton-era rates (as President Obama has proposed) will play no part in that instant austerity. While extending the Bush rates for all Americans carries a $330 billion overall price tag for Uncle Sam next year, the CBO calculated that $42 billion goes to the top taxpayers. But as the chart above shows, eliminating that Treasury-draining windfall for the wealthy (by raising rates for the top-two tax brackets, indexing the AMT and raising capital gains, dividend and estate taxes), would slice only 0.1% from economic growth next year. [Emphasis mine.]
Despite these assurances from CBO that raising income tax rates (from 36 to 39.6 percent) and capital gains and dividend tax rates (from 15 to 20 percent) would have no impact on the economy, Congressional Republicans doubled-down on their "job creator" mythology. While Senator Minority Leader Mitch McConnell (R-KY) warned of "the Europeanization of the U.S. economy," House Speaker John Boehner declared, "Going over part of the fiscal cliff and raising taxes on job creators is no solution at all." Previously, Boehner peddled the GOP's job creators myth this way:
"The top one percent of wage earners in the United States...pay forty percent of the income taxes...The people he's [President Obama] is talking about taxing are the very people that we expect to reinvest in our economy."
As it turned out, Boehner and his conservative amen corner were completely wrong.
The fiscal cliff deal did raise tax rates for individuals earning over $400,000 a year (and families) earning $450,000 starting in 2013. (Including the 3.8 percent Obamacare surcharge, the top capital gains rate moved to 23.8 percent.) But as the White House explained in its jobs report for November 2015, "Our businesses have now added 13.7 million jobs over 69 straight months, extending the longest streak on record." The unemployment rate, which would-have-been President Mitt Romney promised to bring down to 6 percent by the end of his first term, is now 5.0 percent.
And as this collection of charts from the Center on Budget and Policy Priorities (CBPP) shows, U.S. economic growth has proceeded apace:
Of course, this result is nothing new. In 1993, Republicans were united in declaring that Bill Clinton's upper income tax increases would "kill the current recovery and put us back in a recession." Then Congressman John Kasich warned Clinton that "your economic program is a job killer" and predicted, "This plan will not work. If it was to work, then I'd have to become a Democrat." Kasich didn't keep his promise but Clinton kept his. Clinton ended up presiding over the longest and largest economic expansion since World War II. As the record shows, the economy grew faster and produced more jobs when the top marginal tax rate was higher--even much higher:
Nevertheless, the Republicans best and brightest throughout President Obama's first term issued dire warnings about ending the massive Bush tax cut windfall for the wealthy. They denounced Obama's modest proposals as ""job killing tax hikes" and "hurting small business" to "punishing job creators" and "class warfare." That's why Paul Krugman was right when he ended 2015 with this New Year's eve message:
My point that the economy's pretty good job growth despite this tax hike -- raising taxes on job creators! -- refutes right-wing doctrine continues to stand.
To put it another way, the President, the Democrats, the CBO and many of us on the left, well, we told you so.