Obama’s 2016 Budget: A Leap Away From Real Reform
Friday, March 6th, 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.
“The thrust of the individual income tax changes is to raise taxes on upper income taxpayers, primarily through higher taxes on income from savings and investment. The additional revenue would then be used to increase credits for families with young children, workers with low earnings, and two-earner couples,” said Tax Foundation Senior Fellow Stephen J. Entin, PhD. “However, the plan focuses only on redistribution, ignoring economic growth, and the resulting reduction in growth would hurt many of the people the plan is meant to help.”
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.