Boehner To Obama: No, You Tell Dems To Pass Our Tax Bill

[Jon_Trevathan]

91. Debunking Boehner's Claims

House Speaker John Boehner recently stated that “According to Ernst & Young, raising the top rates would destroy nearly 700,000 jobs in our country.” In doing so, John Boehner was implicitly representing to the American people and to his colleagues in Congress that the report's methodologies were credible and its conclusions were worthy of belief. With this understanding, let's take a look at what the report actually had to say. (http://www.nfib.com/LinkClick.aspx?fileticket=OMV7uZczVaM%3d&tabid=1083)

First, the Ernst & Young study was based on a very "long term" macroeconomic model which the authors of the Ernst & Young study described as follows: “For models of this type, roughly two-third to three-quarters of the long-run effect is reached within a decade.” (see footnote 22) Because the context in which House Speaker Boehner cited these job-losses implied that they would be a short-term impact of President Obama's tax policy, the Washington Post assigned Three Pinocchios to Boehner statement (calling his claim "simply absurd&quot .

Since the immediate economic prescriptions needed to help accelerate our anemic recovery must focus on the short-term, it is important to understand that the Ernst & Young study may be understood to actually support the opposite of Boehner's tax policy. In assessing the potential short-run effects, the Ernst & Young ("EY&quot study stated the following:

"While the EY GE model is used to estimate economic impacts in the long-run, the higher tax rates can be expected to have a short-run impact as well, although through a different channel. During periods when the economy is performing below full employment, changes in fiscal policy can be expected to have significant effects on economic performance. During such periods, there is often a strong case for fiscal stimulus provided other avenues for stimulating the economy, such as monetary policy, are not available or have been exhausted" (EY, page 12)

Did you catch that? The authors of the Ernst & Young study acknowledged the roll of simulative economic policies when an economy is weak - like it is today. The Ernst & Young study went on to endorse the predictions of the Congressional Budget Office ("CBO&quot on both the short-term effects should Congress allow our economy to fall off the fiscal cliff and the effects of postponing this economic disruption for another year:

"... CBO projects that under current law policies, the economy will contract by 1.3% in the first half of 2013 before growing by 2.3% in the second half of 2013, meeting the standard textbook definition of a recession of two consecutive quarters of negative economic growth. The CBO also projects that employment would increase by 2 million more jobs under the scenario where the budget deficit is not reduced." (EY, page 12)

Prior to the election House Speaker John Boehner and the Congressional Republicans categorically rejected any tax increase to the wealthy (including contributors to the Republican PACs who tried to buy the election) and his deceitful 700,000 job-loss claim was a shameless and "absurd" scare tactic to further that agenda. This assessment of Boehner's dishonesty can be implicitly underlined when the above quotes from Ernest & Young report and the following quotation are combined:

"While CBO did not separately analyze the near-term effects of the provisions affecting high-income taxpayers, the deficit impact of the higher tax rates is nearly $70 billion or 10% of the total fiscal cliff in calendar year 2013, and totals nearly $1.1 trillion over the ten year budget window. Although a disproportionate share of the tax change is likely to be channeled through savings for taxpayers facing the top tax rates as compared to other taxpayers, these policies can still be expected to have significant effects on output and employment in the near term." (EY, page 12)

Therefore, based on the Ernst & Young report, the following may be concluded:

1. There appears to be some value in the government providing continued support for the demand side of our economy through a stimulus spending. In this regard, because there is near universal agreement that the United States is in need of infrastructure repairs and improvements and because we now have historic low interest rates for the Government's long-term borrowing, it would seem appropriate for Congress to support new investments in America's infrastructure to help jump-start our economy.

2. Since the present "fiscal cliff" law will, according to the Ernst & Young study, cause conditions that meets "the standard textbook definition of a recession", I believe most Americans will be unforgiving if Congress were to allow its propensity for acrimonious debate to further damage the economy. Also, because any delay in passing this legislation will, in itself, cause damage, including reducing the accumulated wealth of everyone with stock and similar investments, it would seem appropriate for Congress to act quickly by supporting President Obama's tax plan, which, in essence, will lower taxes for everyone -- except the very wealthy, from their scheduled January 1, 2013 levels.

3. As to Boehner's insistence that the rich also receive tax reductions, the Ernst & Young report correctly states that a "disproportionate share of the tax change is likely to be channeled through savings for taxpayers facing the top tax rates as compared to other taxpayers". This implies that the short term needs of our economy would be best served by allowing the tax cuts for the rich to expire, as the present law requires, and to use the resulting revenues to stimulate the economy as the Ernst & Young study appears to recommend.

As to the long-term effects of adopting President's Obama's tax plan, it is important to note that the relevant finding of the Nonpartisan Congressional Research Service were as follows:

"The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie.
However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. As measured by IRS data, the share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009. Tax policy could have a relation to how the economic pie is sliced—lower top tax rates may be associated with greater income disparities."
SOURCE: Congressional Research Service, Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945, September 14, 2012 (http://graphics8.nytimes.com/news/business/0915taxesandeconomy.pdf)

This finding calls into serious question the central tenet of Boehner's economic theory. Also, when coupled with the finding that Boehner's 700,000 job-loss claim was "simply absurd", there should be no rational reason (other than self interest) for a majority in the House of Representative to oppose President Obama's plan. It was clear that President Obama's plan to lower taxes for everyone -- other than the wealthy, was the will of the people on election day and, according to a recent Rasmussen poll, 57% of Americans support it today. It is important that we write our Congressmen today to inform them of our displeasure should they permit November to end without the looming budget crisis having been resolved.