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  • Economic Effects of 2011 Tax Hikes: Killing One Bird with Two Stones

    Next January, tax rates will increase—even though the country remains in a recession—unless Congress takes action. The Obama Administration’s solution is to extend the 2001 and 2003 tax cuts except for families earning $250,000 and individuals earning $200,000.

    But is this the right move from an economic perspective, and the right choice to promote deficit reduction? In both cases, the right answer is to extend the tax cuts for all Americans—including top earners.

    In a recent article in The New York Times, Robert H. Frank claims that proponents of keeping current tax rates want to do so “because the economy needs additional stimulus.”

    This conveniently, if sloppily, erects a neat straw man to knock down. Obviously, extending current tax rates won’t serve as additional stimulus. As economist Arthur Laffer explains, “As a result of higher tax rates on those people in the highest tax brackets, there will be less employment, output, sales, profits and capital gains—all leading to lower payrolls and lower total tax receipts. There will also be higher unemployment, poverty and lower incomes, all of which require more government spending. It’s a Catch-22.”

    According to Laffer, the deleterious effects that President Obama’s tax increases would have on the economy will add to the fiscal obligations of the federal government.

    Frank claims that increasing taxes would “generate revenue that could be used to bolster spending in a host of ways that would be useful even apart from the stimulus effects,” but in reality, this increase in revenue would not go nearly as far as he hopes. For Frank, the end game is more federal spending—not deficit reduction.

    Finally, Frank claims that raising taxes on the wealthy would not affect consumption because, rather than reducing spending, higher taxes would come out of savings for top earners. But when the wealthy save, this money doesn’t disappear from the economy—rather, it is invested, which results in more employment and higher wages.

    No matter how you slice it, extending tax relief is the right choice to help stabilize the economy. And even if you don’t put much faith in the incentive effects of marginal tax rates, no economic theory suggests raising taxes during a recession. To tackle deficits, lawmakers need to address their true cause: skyrocketing spending.

    Posted in Economics [slideshow_deploy]

    3 Responses to Economic Effects of 2011 Tax Hikes: Killing One Bird with Two Stones

    1. Billie says:

      There's no rational reason for ANY tax increases to begin with! It's simply, government thievery for the collapse of the freedom of THE PEOPLE of this country. They deceive to appease, truly taking everybody's FREEDOM OF OPPORTUNITY to gain wealth, away.

      To redistribute THE WEALTH OF THOSE THAT DO FOR THEMSELVES ALL THEIR LIVES, when this country stands for freedom to use human ability to do for yourself, while government, insultingly, continues to insist we aren't human enough without government breathing down our backs. That's why they create government intentional consequences to destroy any opportunity to run free market business and work to gain wealth independently by the individuals freedom of choice…

      It's suspicious that immigrants who came to America to take refuge from their governments are now apart of this governmental destruction to the freedom of America. Many work in and under government!!

      Nancy Pelosi insists on taking over things we do for our own children, our own health and our FREEDOM TO LIVE WITHOUT GOVERNMENT.

      Government members, the president included, doesn't have the decency, dignity or the integrity to respect the freedom of individual lives in this free country.

    2. Jill, California says:

      Please keep emphasizing that a tax hike on the wealthy is a tax hike on all of us. The wealthy will pass the tax hikes on to everyone else by way of higher prices. This idea keeps getting lost in the distinction between wealthy and not wealthy.

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