Expiration of High-Income Tax Cuts Probably OK for the Economy

As the months slide by and the sun begins to set on the Bush Tax Cuts, a feisty debate in Congress is ensuing on which tax cuts should be kept and which should be left to expire. Although there seems to be universal support for maintaining the middle class tax cuts, there are proponents of retaining the tax cuts for those earning more than $250,000 (i.e. the 33% and 35% brackets). They allege that letting these cuts expire would stifle job creation.

Arguing that because small businesses are the primary job creators in the economy and that many do not incorporate and pay taxes as individuals, those who oppose the expiration of the upper-income tax contend that doing so would cripple job creation through small business investment. Based on the empirical evidence, however, it appears that higher taxes for the rich are not incompatible with economic growth or private investment.

I leave open the question of how upper income tax rates affect small business hiring, as the question here is: What is the effect on job growth of increasing taxes on the highest income earners? However, the Center on Budget and Policy Priorities notes that the rate of small business job creation under the higher-tax regime was twice that as under the Bush Tax scheme.

During the 1990s, when the top tax rates were at the levels to which they are slated to return in 2011, small business employment rose by an average of 2.3 percent — or 756,000 jobs — per year. In contrast, between 2001 and 2006, when tax rates were lower as a result of the 2001 tax law, small business employment rose at only a 1.0 percent annual rate (367,000 jobs per year) — less than half as much.
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