The Economic Impact of High-Earner Tax Hikes
Costs of Obama’s Plan to Raise Tax Rates on Incomes over $200,000
Washington, D.C., October 25, 2012—President Obama’s proposal to raise taxes on individuals earning more than $200,000 would slow economic growth and reduce future incomes across the board, according to a new analysis by the Tax Foundation. The amount of income that would be lost over the next ten years because of higher taxes varies by state, ranging from $2 billion in Vermont to as much as $241 billion in California.
“President Obama’s campaign to raise taxes on high-income earners presents an overly simplistic view of the economy, as if tax increases only affect those people who write checks to the IRS,” said Tax Foundation chief economist William McBride. “When high income families are hit with additional taxes, they reduce spending on goods and services and invest less. All of this hurts economic growth over the long run, resulting in fewer jobs and lower wages.”
In dollar terms, the states most affected are large, high-income states. California stands to lose $241 billion over ten years as a result of the president’s tax policies, followed by New York at $186 billion, Texas at $131 billion, Florida at $104 billion, and Illinois at $74 billion.
As a percent of income, Wyoming is most affected, losing 1.82 percent of income in 2013, followed by Connecticut at 1.76 percent, New York at 1.61 percent, Delaware at 1.49 percent, and Massachusetts at 1.40 percent. In all, thirteen states are set to lose at least 1 percent of income as a result of these tax increases, and every state loses at least 0.5 percent of income.
Many businesses would also be directly affected by the President’s proposed tax increases, since the vast majority of businesses file under the individual tax code. These so-called “pass-through” businesses, such as partnerships, S corporations, and sole proprietorships, earn more income and employ more workers than companies which file under the corporate code. Most of this pass-through business income (about 66 percent) is reported by taxpayers earning more than $250,000.
Recent economic analyses that take into account the pass-through business sector find that raising personal income tax rates on high-income earners does significant harm is done to the economy. Economists Robert Carroll and Gerald Prante, for example, found that 710,000 jobs would be lost as a result of President Obama’s tax policies.
Tax Foundation Fiscal Fact No. 333, “How State would be Affected by Obama’s Proposed Tax Increases on High-Income Earners” by William McBride is available online.
The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.
