A new report prepared by Ernst & Young further discredits Obama’s proposed tax hikes. The findings in this report show just how terrible Obama’s ‘soak-the-rich’ policy would be for the economy.
Through lower after-tax rewards to work, the higher tax rates on wages reduce work effort and labor force participation. The higher tax rates on capital gains and dividend increase the cost of equity capital, which discourages savings and reduces investment. Capital investment falls, which reduces labor productivity and means lower output and living standards in the long-run.
Output in the long-run would fall by 1.3%, or $200 billion, in today’s economy.
Capital stock and investment in the long-run would fall by 1.4% and 2.4%, respectively.
Real after-tax wages would fall by 1.8%, reflecting a decline in workers? living standards relative to what would have occurred otherwise.
These results suggest real long-run economic consequences for allowing the top two ordinary tax rates and investment tax rates to rise in 2013. This policy path can be expected to reduce long-run output, investment and net worth.