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National Taxpayers Union: Tax Increases Will Kill Jobs

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The President is on the road doing his best to win public support over his jobs plan. C-Suite insiders tell me they were not surprised to see the President revert to his favorite standby: raising the taxes on people who make $250,000 or more.

Anytime this "magic" number is uttered, I hear from Wall Street's best and brightest who say that increasing taxes will kill jobs.

I was on the phone with Bernie Marcus, founder of Home Depot (HD) Tuesday afternoon and, to put it politely, he was less than thrilled on the President's jobs plan explaining why it will kill jobs. Marcus gave me a list of job killers- ranging from the uncertainty of regulation like Dodd Frank, the EPA and of course taxes. Marcus' opinion on this is nothing new. He is in the majority of those who I speak with in the C-Suite.

So what could be the cost of President's tax hike? I caught up with Pete Sepp, Executive Vice President of the National Tax Payers Union on what this could mean for the country's unemployment rate.

LL: How much will these tax increases impact unemployment?

PS: The impact is likely to be substantial – and in the wrong direction. Take just two elements of the package of proposals affecting certain oil and gas companies, a favorite target of the Administration. One is eliminating the Section 199 domestic manufacturing deduction, the other changing “dual capacity” rules that protect companies with earnings abroad from being double-taxed on the same income.

These provisions are available to all sectors of our economy that qualify; dropping them in favor of systemic tax reform that would broaden the base and lower rates for everyone, the jobs is one thing, but this bill repeals them only for oil and gas. When a one-two punch like this was thought to be part of a deficit reduction plan earlier this summer, LSU Professor Joseph Mason conducted a study using standard modeling tools projecting over 150,000 lost jobs as a result.

Some will naturally disagree with these findings, but even if they proved to be half true, many Americans, especially in energy-producing states, would be stuck with more economic misery.

There are other possibly negative impacts besides those on jobs. Take what some might consider a slam-dunk for passage – the proposal to tax carried interest as ordinary income rather than at the lower capital gains rates.

There’s actually plenty of robust debate over how to get this policy right. Since hedge fund managers tend to get paid through returns they produce for investors, some argue that increasing the tax rate might act as a counter-incentive to maintain high investment performance, which could impact more than the managers themselves. Others, right on this site, have argued about additional drawbacks.

Policymakers tend to agree that a growing economy with solid employment opportunities is a government treasury’s best friend – it helps increase income, payroll, and even excise tax revenues without raising tax rates. The opposite occurs when jobs are destroyed and citizens pay less in taxes. The LSU study projected that after adjusting for this phenomenon, government would on balance lose over $50 billion in revenue because of reduced activity in oil and gas.

Remember too that on paper at least, the Administration can only reach its $400-plus billion revenue target to “cover” most of the bill’s job-creation provisions over a 10-year window, beginning in 2013. So, the majority of the tax cuts last only for 2012, while the tax increases would last forever (unless the super committee comes through with sufficient extra savings). To businesses and individuals this sends a message that is tenuous at best, discouraging at worst.

By 2013, many tax hikes from the Patient Protection and Affordable Care Act will take effect, including new surtaxes on higher incomes and restrictions on the medical expense deduction (which will affect many middle-class taxpayers). The thresholds to which the upper-income taxes apply are not indexed for inflation, so as time goes on their reach will spread much like that of the Alternative Minimum Tax. A study we conducted last year shows how such policies could get out of control.

With worries like these – some of them materializing about fifteen months from now – can modest, targeted tax relief provide a business and consumer confidence boost in the meantime? The evidence from previous short-term rebate/holiday tax programs at the federal and state levels does not seem conclusive in suggesting a huge bump, even without the prospect of higher rates ahead. One exception seems to be repatriation (described below).

LL: The amount of children living in poverty has dramatically popped. Will these tax increases further push that number up?

PS: Well, they aren’t likely to bring that number down. The beefed up payroll tax relief and the extended expensing in the package will help some workers and businesses keep their heads above water, which is why we’re not opposed to their enactment.

Still, if even some of the projections about the oil and gas tax increases came true, many families headed by one or two solid breadwinners now might find themselves without the financial cushion they need to maintain a middle-class lifestyle.

There might be indirect effects from other tax provisions. If, for example, there’s a negative impact on charitable giving because of new deduction limits, non-profit social-work organizations might find their funds squeezed to the point where they can’t help as many struggling families. Some of the charities themselves might have to pare back their staffs, ironically adding to the problem they’re trying to combat.

This is not some fantasy concocted by the anti-tax right. Over 100 charities recently expressed concern over limits to the tax deduction in an open letter to the President and Congress. Granted, every interest that could potentially be affected by a tax change tends to speak out in this manner; plus, Americans are incredibly generous to the less fortunate, even in tough economic times when their own budgets are squeezed. Still, these concerns can’t be dismissed out of hand.

It’s a similar story for many of the spending programs. The bill’s extension of unemployment compensation might keep some families from slipping below the poverty threshold, and the flexibility the bill provides to states in experimenting with their benefit packages could be useful. But will the bill go one better and actually lift people back into gainful employment?

The verdict is far from clear. For example, earlier this year Congress’s own Government Accountability Office concluded that the federal government spent $18 billion in 2009 on at least 47 separate employment and job training programs. About half of those programs haven’t even had basic performance reviews conducted on them since 2004. Yet, the new bill would put another $5 billion into a “Pathways Back to Work” initiative. If we don’t know enough about the results from the money we’re already spending, how are we to expect a dramatic change from putting more federal funds on the table?

LL: GOP is balking against these tax hikes and will not pass in the House. Realistically what will we see in terms of tax hikes?

PS: During our 40-year history, the National Taxpayers Union has witnessed more than a few Republicans go south on their promise to oppose tax hikes. This, along with the absence of mechanisms to promote long-term budget discipline, is why we decided to oppose the final version of the Budget Control Act that Congress passed. So, we’ve learned never to say never when it comes to predicting the chances of any tax increase getting through.

But as much as proponents of these proposals would like to ignore it, there is some opposition from Democrats, especially in the Senate, to many of the tax increases in the legislation. Although he seems to have softened his stance somewhat lately, Senator Schumer has noted reservations over tinkering with the carried interest provisions, while other Senate Democrats, among them tax-writer Max Baucus, have expressed skepticism over modifications to the charitable deduction.

And, in May of this year three Senate Democrats – Mark Begich of Alaska, Mary Landrieu of Louisiana, and Ben Nelson of Nebraska – voted against a package of oil and gas industry tax increases that was similar to what the Administration wants. This may seem like a handful, but the way the Senate is constituted right now, it matters a great deal. With ordinary folks in these and other states increasingly worried about holding on to the jobs they have, it would seem politically as well as economically self-destructive to vote for taxes that could make matters worse.

LL: What is the cost of Obama's plan- how many jobs will truly be created or saved?

PS: Entire legions of economists and politicians would give just about anything to know the answer to that question! The thing that neither the President nor campaign-trail-bound lawmakers like to admit is that even the best policies put into place now might not pay off in substantial job creation for some time, well into next year at the soonest. What would those “best policies” look like? They would not rely as heavily on narrow tax policies or borrow-and-spend, make-work programs that have already proven underwhelming. Ratifying stalled trade agreements is certainly an element of the President’s plan worth pursuing.

Opening a multi-year “repatriation window” for U.S. firms’ profits parked overseas because of an uncompetitive tax system would be beneficial in the short run, both for attracting investment and for raising some cash for Uncle Sam. It’s also supported by both Democrats and Republicans in Congress. A bipartisan commitment to long-term tax reform would be an even more helpful step. Senators Ron Wyden and Dan Coats have proposed legislation that is not perfect in this regard, but it’s a start.

The two parties could also agree on more substantial relief from needlessly burdensome federal regulations, especially on businesses already fretting over how they’ll comply with upcoming health care mandates. On the environmental front, taking a break on new ozone rules has given some comfort to private firms as well as state and local governments, but more could be done without compromising health or safety.

A solid plan for the federal government to get its own finances in order would likewise buoy investor confidence at home and abroad. Would Congress’s super committee come up with such an answer? As a recent study from the NTU Foundation about the committee’s members showed, their legislative agendas don’t immediately suggest they could agree on a unified strategy. Which is why we’re giving them a little help later this week, in the form of a report from NTU and the U.S. Public Interest Research Group on “common ground” deficit reduction ideas. If two groups this far apart on the ideological spectrum can do it, so can Congress and the President!

A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."


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