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Fact Check: Industry-Financed Study Gets President’s Tax Cuts Wrong

Analysis from Jason Furman, Principal Deputy Director of the National Economic Council, highlights the major flaws, errors and misleading statements in a report on President Obama's tax plan.

There’s a lot of room for debate about taxes and we welcome that debate, which is why the President continues to push Congress to act on extending tax cuts for 114 million middle-class families. But we will continue to demand that this debate is based on facts and analysis from non-partisan, independent sources—not based on industry studies like one that was released this morning by Ernst & Young done by former Bush appointee and paid for by industries that have a record of opposing the President’s policies.

The study’s estimates are based on policies that are at odds with the President has actually proposed, omit key proposals the President has made and employ flawed assumptions that are at odds with respected independent analysts like the Congressional Budget Office – and even with the findings of the Bush Administration Treasury Department. Relying on analysis by the Congressional Budget Office, the Joint Committee on Taxation, and even Chairman Paul Ryan’s own budget demonstrates that the President’s proposals are good for job growth in both the short and long run.

Below is an analysis by Jason Furman, Principal Deputy Director of the National Economic Council, highlighting the major flaws, errors and misleading statements in the study:

  • The study fallaciously assumes that the tax cuts are used to finance additional spending, ignoring the benefits of what the President actually proposed which was to use the revenue as part of a balanced plan to reduce the deficit and stabilize the debt. The President has proposed to let the high-income tax cuts expire and use the resulting $1 trillion in savings (over 10 years) as part of a balanced plan to reduce deficits and debt and put the nation on a sustainable fiscal course that includes $2.50 of spending cuts for every $1.00 of revenue.  But rather than modeling the President’s proposal to reduce the deficit, the headline numbers in the study explicitly assume that the revenue would be used entirely to finance additional spending.  In fact, the study explicitly states, “Using the additional revenue to reduce the deficit is not modeled.”  [Source:  footnote on page 3]
  • The study also leaves out the President’s proposed new tax cuts for business hiring and investment.  The President has proposed to cut taxes by $80 billion in 2012 and 2013 by enacting a new 10 percent tax credit for business hiring and wage increases and allowing immediate write-offs of new investment through the end of 2012.  Not only are these tax cuts larger in dollar-terms than the near-term tax increase for the top two percent of Americans that would result from letting the high-income tax cuts expire, but they are far better targeted toward boosting jobs and growth. In fact, even Chairman Paul Ryan’s Budget shows that the President supports taxes that are $42 billion lower in 2012 and 2013 than under the Republican plan. [Source]
  • The authors of the new study acknowledge that it has no bearing on the impact of the President’s proposals on the economic recovery and employment in the short-run.   In fact, even they acknowledge that the short-run impact of extending the high-income tax cuts will be proportionately less than the impact of the middle-income cuts, noting that a “disproportionate share of the tax change is likely to be channeled through savings for taxpayers facing the top tax rates as compared to other taxpayers.”  This is consistent with conclusions of the Congressional Budget Office and other independent analysts.  For example, CBO concluded that – compared to extending all of the 2001 and 2003 tax cuts, including those for the highest-income Americans – the President’s proposal to extend just the middle-class tax cuts “would be more cost-effective in boosting output and employment in the short run because the higher-income households that would probably spend a smaller fraction of any increase in their after-tax income would receive a smaller share of the reduction in taxes.”  [Source]
  • Even setting aside the fact that the study ignores the effects of the President’s tax proposals on short-term growth and long-term deficit reduction, the conclusions are still dramatically out-of-line with estimates by other analysts, including not only the Congressional Budget Office but also the Bush Administration Treasury Department.  The authors’ unrealistic assumptions lead them to find a larger increase in long-run output and about twice as large an effect on employment over the long-run as the Bush Administration Treasury Department found when conducting a similar analysis of extending the high-income tax cuts.  [Source]  This appears to mostly result from the fact that the study makes highly unrealistic assumptions about the economic impacts of tax cuts.  In particular, it assumes a labor supply response to tax rates that is about ten times as large as what the Congressional Budget Office assumes for medium- and high-earners. [Source] The new study is also inconsistent with recent historical experience.  Under the President’s plan, income tax rates on high earners would simply return to what they were in the 1990s – when the economy created 23 million jobs.

The truth is that the Congressional Budget Office, the Joint Committee on Taxation, and other independent analysis have found that letting tax cuts expire and using the resulting revenue for deficit reduction would help the economy over the long-run because it would lead to lower interest rates and higher investment–the opposite of what the industry-financed study concludes.  For example, CBO found that output would be higher in 2020 if the Bush tax cuts were allowed to expire than if they were extended and led to higher deficits.  Likewise, a 2005 Joint Committee on Taxation study reached the same conclusion about individual income tax rate cuts. And the President’s additional tax cuts to encourage business job growth and investment would have further benefits as well.

Amy Brundage is the Deputy Press Secretary for the Economy