In other words, tax increases proposed by President Obama would have a major contractionary impact on economic growth, and by implication, job creation and employment regardless of changes in government spending, what the Fed does or what happens to the price of oil etc.
How big an impact? In his 2013 budget, President Obama proposes $103 billion in 2013 tax increases, including $83 billion of higher income taxes on those who make more than $250,000 a year, or about 0.65% of GDP. Using the Romer baseline estimate, that would reduce real GDP by 2 percentage points over the next 10 quarters. Based on the general relationship between economic growth and unemployment, such a fall in output implies a loss of more than 800,000 jobs.
The Presidentâs budget fails to mention, far less include, the negative effects of its proposed tax increases in its economic assumptions. Instead, it assumes real GDP growth will accelerate to 3.0% next year and to 3.6% in 2014. Based on the Romersâ study, it is far more likely real GDP growth would slow to near 2% next year and remain well below 3% in 2014.
Slower growth would shrink the tax base by a cumulative $700 billion over the next 3 years. And, with tax revenues estimated at 19% of GDP, that implies tax collections would fall $130 billion below forecast over the next 3 years, and by more than $600 billion over the next 10 years. Pressure for increased spending to provide relief to individuals who lose their jobs or who no longer can get a job in the form of unemployment benefits, food stamps, Medicaid and the like would make it all the more difficult to restrain spending, further offsetting any forecasted reductions in the federal budget deficit due to the tax increases.
Such a growth recession would also create havoc with state and local government budgets, where revenues have just now recovered to their pre-recession levels. Unlike the federal government, states would not receive any additional revenues from the hike in federal taxes. But, they would suffer the full loss of revenues and increased spending due to a smaller economy.
The publication of the Romersâ research and the soon thereafter resignation of Dr. Romer from the Obama White House to return to Berkeley undermines the authenticity of President Obamaâs oft repeated claims that his proposed budget would increase economic growth and produce an âeconomy built to last.â Given the importance of her work â only the most important research is published by the American Economic Review â it is hard to imagine Professor Romer failed to inform her boss she was publishing an analysis that said the administrationâs proposed tax increases would almost certainly be âhighly contractionary.â
If she failed to so advise the President, she would be guilty of unimaginable treachery and betrayal in her role as the Presidentâs chief economist.
If she did convey her findings and the White House chose to ignore them, the implications are staggering and deserve to be the subject of Congressional hearings. In such a case, it would appear President Obamaâs zeal for massive tax increases trumps all of his talk about the importance of job creation and economic growth.
The vital questions that remain are:
⢠Does the Obama administration fail to grasp the implications of its own analysis â that the President is proposing tax increases that would throw hundreds of thousands of people out of work?
⢠Or, does the Presidentâs allegiance to his ideology and his version of fairness mean that he simply does not care about the lives and fortunes of those who would suffer as a consequence of his policies?
⢠Has âputting government firstâ become the new mantra of the president and the Democratic Party?
And will the White House press corps â or Democrats and Republicans alike â demand that the American people be given an answer?
http://www.forbes.com/sites/charles...mer-knows-tax-hikes-will-kill-the-recovery/2/