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August 10, 2010 Tuesday 12:01 AM EST
SECTION: NEWS & COMMENTARY; Commentary; Irwin Kellner
LENGTH: 556 words
HEADLINE: Killing geese that lay golden eggs
BYLINE: Irwin Kellner, MarketWatch mailto:Ilkellner@gmail.com.
Irwin Kellner is MarketWatch’s chief economist.
PORT WASHINGTON, N.Y. (MarketWatch) — Raising taxes on the top 2% of Americans is tantamount to killing the goose that lays the golden eggs.
The administration wants to let the tax cuts passed under President Bush for the wealthiest Americans expire at the end of this year, while keeping the cuts intact for everyone else.
Effectively this is a tax increase. And while it may seem fitting for the “rich” to pay more in these days of humongous budget deficits, in reality it might well exacerbate our deficit problem rather than ameliorate it.
While many people in the top tax bracket might, indeed, be well off, quite a few are small-business owners who file their tax returns as individuals. This group includes such people as contractors, farmers, lawyers, accountants, consultants and other service providers, and even a few manufacturers.
Small businesses such as these are responsible for just about all the new jobs that are created these days. Raising their taxes adds one more cost to their burden which includes, among other things, a big increase in the cost of providing health care for their employees, thanks to recent health-care legislation.
If they believe that the cost of adding workers will exceed the benefits, these small businesses simply will not hire. As a result, the jobless ranks will be larger than they otherwise might be, leading to less tax revenues and more spending on unemployment benefits.
Speaking of which, the revenues derived from taxing the top 2% of all Americans are not large in the great scheme of things.
Judging by the statements of Treasury Secretary Geithner, as well as other administration officials, those in the top tax bracket pay about $70 billion a year to Washington. This is small potatoes compared with a deficit estimated to be $1.6 trillion for the current fiscal year.
That said, it follows that extending the Bush tax cuts for a year or even two is not by itself going to contribute all that much to the flow of red ink. Indeed, it might well give the economy a shot in the arm by eliminating a major uncertainty facing small-business people.
As for the argument that taking from the rich and giving to everyone else is a more effective way to spur the economy, since the wealthiest people tend to save a lot while everyone else spends, this does not hold true for everyone in the top bracket. Small-business people’s propensities to consume are the same as everyone else — if not greater.
Another point that some make is that a tax increase during the early years of the Clinton administration did not impede economic growth, but rather, helped foster it. No one knows for sure whether this was the case, but one thing is certain: The economy of 1993 was a lot different than it is today.
For one thing, it was entering its eighth quarter of expansion. For another, the recession of 1990-91 was relatively mild by historical standards. Most important, the jobless rate was a little over 7% and employment was growing significantly.
Today’s climate is also different in that businesses are confronted with a slew of regulations, which, along with the prospect of tax hikes, is creating more uncertainties than many can handle.
That’s why they are not hiring.
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