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November 9, 2012

Fact check: Would tax hike on wealthy kill 700,000 jobs?

By Glenn Kessler
The Washington Post

"The president wants to raise taxes on the wealthiest 2 percent of Americans. But what that does is it net loses 700,000 more American jobs that are really from people who need those jobs."

— Rep. Pete Sessions, R-Texas, on Fox News, Nov. 8

"According to Ernst & Young, raising the top rates would destroy nearly 700,000 jobs in our country."

— House Speaker John Boehner, R-Ohio, Nov. 9

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The presidential election is over. Time to get ready for the fiscal cliff!

The fiscal cliff is the looming end-of-the-year expiration of the Bush-era tax cuts and the automatic spending cuts mandated by the Budget Control Act. The double whammy would likely sink the economy, though Democrats and Republicans disagree on the best approach for resolving the problem.

For his part, President Barack Obama has long urged retaining the Bush tax cuts for workers making less than $250,000, but letting tax rates (and some other provisions) rise for the wealthiest Americans. Republicans have opposed this, in part because they say it would harm small businesses that organize themselves so earnings or losses are passed though to the shareholders — who then are taxed at the individual tax rate.

Rep. Pete Sessions, however, went further and claimed on Thursday that hundreds of thousands of people would lose their jobs if Obama's proposed tax increase went into effect. And Boehner on Friday repeated the claim at a news conference. What's the math behind this claim?

The Facts

According to an aide, Sessions obtained his figure from a study prepared last year by two economists at Ernst & Young for the Independent Community Bankers of America, the National Federation of Independent Business, the S Corporation Association and the U.S. Chamber of Commerce — all opponents of the president's agenda.

That might be the first clue that this is potentially not a neutral document. One of the authors is also a former official in George W. Bush's Treasury Department.

The study is titled "Long-run macroeconomic impact of increasing tax rates on high-income taxpayers in 2013."

In other words, this is not an immediate impact, but the "long run." You have to dig into the endnotes on page 22 to find a definition of long run: "For models of this type, roughly two-third to three-quarters of the long-run effect is reached within a decade."

Oh. So, even if one accepts the assumptions in this model — a big "if" — it still means that the loss of 700,000 jobs would not come in the first year, or by the end of Obama's second term, or even a decade from now. Yet Sessions says the jobs would be taken "from people who need those jobs," suggesting it would have an immediate effect.

Moreover, while 700,000 jobs sounds like a lot, it actually translates into one-half of 1 percent of total employment. Given that this is a long-term prediction, there is certainly a lot of room for error. So much is dependent on the assumptions in the model.

There is also another revealing endnote: "Using the additional revenue to reduce the deficit is not modeled."

That means the analysts did not even study the effect of Obama's stated purpose for raising taxes; the 700,000 figure assumes that the revenue raised from the tax increase would be used for increased government spending. Yet presumably any deal on fixing the fiscal cliff would result in a lower federal deficit, since all sides agree they have that goal.

Indeed, there are also long-term effects from permanently extending the tax cuts without cutting the deficit. This is what the Congressional Budget Office said in 2010, after studying the impact of full, partial or temporary extensions of tax cuts: "The permanent extensions of the tax cuts would have much larger negative effects in the long term than the temporary extensions because the amount of additional government debt would be so much larger."

In other words, focusing just one variable — an increase in taxes — is a bit simplistic. By itself, raising taxes likely leads to a reduction in employment. But the use of that additional revenue over the long term is also important — such as whether it is used to reduce budget deficits or boost government spending.

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Sessions is able to point to a study (though he stated the 700,000 figure as a fact), but on several levels his claim is misleading.

First, the study was underwritten by the White House's opponents. Second, the study never examined what Obama claims he will do with the revenue — dedicate it to deficit reduction. And finally, the total figure is so "long term" — more than 10 years away — that it is absurd to suggest those jobs would be lost in the near term.

As for Boehner, he did attribute the figure to Ernst & Young, but he went even further in saying the top rates would "destroy" 700,000 jobs. As we said, that is simply absurd.

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Read The Fact Checker: the Truth Behind the Rhetoric, at www.washingtonpost.com/blogs/fact-checker