Obama’s 2016 Budget: A Leap Away From Real Reform
New analysis shows plan would result in reduced GDP and the loss of upwards
of 809,000 jobs
Washington, DC (Mar 3, 2015)—In his 2016
budget, President Obama proposes a variety of tax increases on saving and
investment as well as the creation or expansion of a number of tax credits. Some
economists are concerned about the impact these changes could have on the U.S.
economy, and according to the latest numbers, many of their concerns are
warranted. A
new analysis from the nonpartisan Tax Foundation indicates that the
president’s budget would cost the U.S. a significant amount of full time jobs
and result in the reduction of GDP and workers’ wages.The report’s key findings include:
- The Taxes and Growth (TAG) Model finds the plan would shrink the economy by 3 percent, lower the level of investment by 8 percent, reduce wages by 2.4 percent, eliminate 809,000 jobs, and lose $12 billion in federal revenue over the long run due to lower growth.
- If the revenue available for business tax reform were used to lower the corporate tax rate, it would result in a 3 percentage point cut in the rate—far less than a cut to a 28 percent rate as hoped for by the president’s budget.
- With the lower corporate tax rate, the plan would still shrink the economy by 2.4 percent, decrease investment by 6.2 percent, reduce wages by 1.8 percent, eliminate 679,000 jobs, and lose $4 billion in revenue over the long run.
This plan highlights a century-old debate over whether to tax income or consumption. The focus of the broad-based income tax (which taxes income when it is earned and again when investment earnings are realized) is to aid in wealth redistribution. On the other hand, the focus of a consumption based tax (one that falls equally on income used for consumption or saving and investment) is to avoid penalizing saving relative to consumption as to not discourage economic growth.
The 2016 budget aligns with the income based approach. Historically, reforms that have moved towards the broad-based income tax—like the 1986 Reagan tax reform and the Obama 2012 budget agreement and the tax elements of the Affordable Care Act—have generally reduced wages and employment and discouraged capital formation. Alternatively, reforms that moved away from this approach—such as the 1961-1963 Kennedy tax cuts, the 1981 Reagan tax cut, and the 2001-2003 Bush tax cuts—have helped to raise productivity, wages, and employment.
