Tax workers - or the rich?
Obama's plan to soak high earners may hurt the economy less than broad-based tax hikes, writes TD Bank
Tax workers – or the rich?
Joseph N. DiStefano
With Obama re-elected, "will the fiscal cliff be avoided in 2013 and the economy spared?" asks Beata Caranci, economist at Toronto-based TD Bank, whose U.S. headquarters is in Marlton, in a note to clients.
For the lame-duck government and the new, similar gang, "the first order is to avoid the fiscal cliff," which is intended to cut the deficit in the long term, but also expected to stall the economy and hiring in the short term. "The second order is to evaluate the economic impact of the policies that will ultimately be put in its place ...
"If everything that is legislated to expire in the New Year actually took place, many private sector forecasters and the Congressional Budget Office estimate the drag to real GDP growth next year would be in the 3-4 percentage point range.
"There is little debate among politicians and economists that this would return the U.S. economy to recession.
"While the President shepherds the discussion, Congress ultimately decides the path of fiscal consolidation and the ability to reach agreement is crucial to this outcome ... Even with a majority Republican House, a Democrat Senate and a Democrat President, the prospects of a recession should prove distasteful to all and act as a catalyst towards compromise among rational individuals ...
"We view the odds of running off the cliff and remaining in complete free fall to be relatively low (at 10% or less) ... A (more) probable scenario is to kick the can down the road, temporarily extending deadlines to allow for more extensive discussions within the new Congress."
Obama's victory makes it more likely tax hikes will focus on the rich, not the mass of working people -- and that's a good thing for the economy as a whole, Carangi adds:
"It may be surprising to some that Obama’s more numerous tax increase proposals – health care, high income earners, dividends, capital gains" result in less "drag" on gross domestic product than broad-based tax hikes, because "the economic drag from a tax hike on an individual earning $500,000 is less than that of one earning $50,000.
"The reasons are numerous, but a key factor is that consumption among high income earners tends to be less sensitive to changes in income than middle and low income earners. Second, mathematically, high income earners make up a smaller portion of the population. So the biggest single economic drag from taxes next year comes from the expiration of the temporary two percentage point reduction in payroll taxes that affects all workers and tops out at $110,000 in labor income ...
"An Obama White House may be open to the possibility of new middle-class tax breaks to replace the payroll tax cut. Republicans may find this agreeable ...
"Fiscal consolidation in the U.S. is absolutely necessary and unavoidable, but the dispersion of forecasts among students of fiscal policy argue strongly in favor of a go-slow approach," so we don't end up like Europe, where the shock of budget cuts has slowed economies without giving any sign, so far, that the long-term gain is worth the pain.