Wealthiest pay bigger bills with scant U.S. economic harm

As the political fight over raising taxes for high-income Americans fades away, so are predictions for negative economic fallout.

The bill for President Barack Obama’s 2013 tax increases comes due April 15, and the first boost in marginal income rates in 20 years is already reducing the U.S. budget deficit without tipping the economy into recession.

“In advance one always hears the squeals of the oxen who would like everyone to think they are about to be gored,” said James Galbraith, an economist at the University of Texas at Austin. “Then it turns out that they are only nicked, and life goes on.”

The U.S. government is projected to collect more than $3 trillion for the first time in the fiscal year ending Sept. 30, a 9.2 percent increase over last year, according to the Congressional Budget Office. CBO forecasts another 9 percent rise in 2015 and estimates that more than half of the increases in revenue stem from tax law changes.

Because of tax increases, spending cuts and economic growth, the federal budget deficit is projected to be 3 percent of gross domestic product this year. That’s less than half its 2012 level and the smallest budget deficit since 2007.

In January 2013, just after President George W. Bush’s tax cuts expired, Congress reset the top marginal income tax rate at 39.6 percent, the same level it reached under President Bill Clinton.

No push

Even congressional Republicans, who warned that the tax increases would destroy jobs, aren’t making a serious push to repeal them. They’re acting as though the new tax rates and increased take for the U.S. government are here to stay, even if they don’t like it.

House Republicans’ budget plan and draft tax-code revamp call for reshuffling the tax system in ways that would reduce top rates without actually reducing the amount of money the government collects. Also, the tax plan was designed so it wouldn’t cut the share of taxes paid by top earners.

Senate Republicans didn’t include a major rollback of Obama’s tax increases in their latest job-creation plan, instead focusing on repealing the 2010 health care law and blocking regulations that would limit energy production.

Those affected

The people affected by the tax increases include corporate executives, lawyers, doctors and people who report their business profits on their individual tax returns.

The tax increase constrains cash flow for the most successful small businesses, especially those with limited access to credit, and it’s one reason why the economic recovery has been slow, said Douglas Holtz-Eakin, a former director of the Congressional Budget Office.

“It would have been a good idea to get everyone back to work before you decided to redistribute the income,” he said. “You’ve raised the marginal tax on the return to both high-income labor and high-income saving and investments. There’s a clear incentive to do less of that.”

Much of the economic damage caused by the tax increases of 2013 had nothing to do with the expiration of the Bush tax cuts. Instead, the lapse of a 2 percentage-point payroll tax reduction took money out of consumers’ pockets at all income levels, said Ward McCarthy, chief financial economist at Jeffries LLC.

“It put a bite on consumer cash flows,” he said. “The payroll tax, frankly, was more painful in some sense than the higher marginal tax rates.”

That change ended four years of expanded paychecks because of the payroll tax cut and its predecessor, the Making Work Pay tax credit Obama campaigned on in 2008.

California’s example

California in November 2012 approved a temporary increase in the tax on retail sales and set a nation-high tax bracket of 13.3 percent on incomes of more than $1 million. Opponents warned that it would extract a toll in lost jobs, as businesses cut costs or fled to other states.

The reality in California, now benefiting from another technology rally fueled by companies such as Twitter Inc. and a reviving real-estate market, has been different. While job growth slowed in 2013 from a year earlier, employers still expanded their payrolls by 2.6 percent, faster than the 1.7 percent pace in the U.S., according to U.S. Labor Department data compiled by Bloomberg.

“There’s just no evidence that the income tax increases have had any substantial impact on California’s economic growth,” said Christopher Thornberg, founding partner of Beacon Economics, a Los Angeles-based economic consulting firm. “It just is not the primary driving force the way some people think it is.”

With assistance from William Selway in Washington.