As Barack Obama and the Democrats in Congress finalize plans for whom to increase tax rates on and by how much – all in the name of preventing the nation from going over the "fiscal cliff," of course – the following may being of interest to readers of this page, if not to the politicians.
Earlier this month, Scott Hodge, President of the Tax Foundation, published a ranking of fifteen ideas to create "new revenues as a component of any bipartisan deal to reduce the federal deficit." Hodge utilized findings of extensive studies by OECD economists (a 34 nation organization of which the U.S. is a member) that established a hierarchy of which taxes are most and least harmful for long-term economic growth.
For what it's worth, economic growth is something President Obama claims to be his objective, too. You might think that if the President just pulled some ideas out of the OECD grab bag, he would get lucky and pick at least one decent one. Instead, he has zeroed in on the most economically damaging of all possibilities.
With the OECD framework as a starting point, Hodge and the Tax Foundation evaluated and commented on potential outcomes from Obama's contributions to the fiscal cliff negotiations.
Rather that promoting growth as Obama claims, wrapped up in his fiscal cliff proposed idea package are three of the four MOST HARMFUL actions that could be taken among the entire list of fifteen possibilities evaluated by the OECD.
According to Hodge raising tax rates on high income individuals – the current Holy Grail for Obama – will result in lowering GDP by 0.44%. As a result, for every $1 of new revenue to the government, GDP would shrink by $2.77.
Increasing the capital gains and dividend tax rate as Obama has championed would hammer the GDP by 2.15% - essentially erasing the average growth rate for the last three years.
Increasing estate taxes (the death tax) as proposed by Obama will reduce GDP five times more than revenue gains according to the Tax Foundation. And yet, the Democrat Senate has already voted for even higher death tax rates than proposed by the President.
The worst-of-the-worst ideas would be to raise corporate tax rates. And while not part of the fiscal cliff negotiations, as Hodge points out, Obama has expressed a willingness to lower the business tax rate as part of overall tax reform, but only in exchange for "base broadening measures" that the Tax Foundation says would "more than erase the positive effects of cutting the corporate tax rate."
The complete Tax Foundation commentary is available by clicking here, including a list of ideas that actually might work.