Obama Tax Hikes
Obama Tax Hikes
NOTE: Nothing written here is to be construed as necessarily reflecting the views of The Heritage Foundation
or as an attempt to aid or hinder the passage of any bill before Congress.
CDA04—01
CDA10-07 September 17, 2010
September 20, 2010
Abstract: Since 1996, Congress after Congress has voted to lighten the tax burden on Americans. The cur-
rent Congress will decide this fall whether to continue this policy or to significantly raise personal income
taxes. President Obama has advanced a plan that reverses the long-standing successful policy: The President
and his supporters are calling for tax increases, primarily on upper-income taxpayers and businesses—
including small businesses, the primary job creators in the country. Those who will be most burdened if this
plan becomes law are the millions of Americans just starting their economic lives and the millions more trying
to find work after the worst recession in 60 years. The rest, whose lives are affected by the investments and
business decisions of those taxpayers in the high-income classes, will share the burden. No income earner will
be unscathed. Instead of extracting more income from the private economy, Congress should immediately
reduce its spending and enact fundamental entitlement reform that supports strong economic growth. Heri-
tage Foundation economists explain why employment and the economy cannot be made to grow through
higher taxes—and how crucial it is for Congress to recognize this fact.
The Members of the U.S. House and Senate are (FY) 2011 budget that would hold tax levels con-
about to engage in one of the most consequential stant for most married taxpayers with incomes
tax policy debates of the past 50 years. At stake is below $250,000 and single taxpayers with incomes
the nation’s tax policy. For 14 years, Congress after below $200,000, and raise taxes on those who earn
Congress has voted to lighten the tax burden on tax- more. Indeed, it is both the impending expiration of
payers. The current Congress will decide later this lower tax rates and the President’s and congressional
fall whether to continue this successful policy and leadership’s tax hike proposals that shape this com-
extend the tax relief laws currently in force or signif- ing debate.
icantly raise personal income taxes. If Congress enacts the Obama tax hike, it will
Two developments have prompted this historic have changed the course of long-standing tax policy.
policy debate. On the one hand, tax laws passed in With the exception of the recently enacted Patient
2001 and 2003 under Congress’s peculiar budget Protection and Affordable Care Act (PPACA), no
rules means that key tax rates and tax credit or Congress has voted to raise significant sums of new
deduction provisions will revert to their higher, pre- tax revenues since 1996. Indeed, the fundamental
2001 levels on January 1, 2011. Congress could, of tax policy of this country until now has been to
course, extend these lower rates for a specific time reduce tax burdens.1
or, preferably, permanently. This policy has largely been driven by a biparti-
On the other hand, President Barack Obama has san understanding that lower tax rates support
proposed several changes to tax law in his fiscal year stronger economic growth. Certainly, that view ani-
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THE HERITAGE CENTER FOR DATA ANALYSIS
mated the debates over the 2001 and 2003 tax leg- plan by introducing it into a model of the U.S. econ-
islation, each of which resulted in lower, though omy that leading government agencies and Fortune
temporary, tax rates and tax liabilities. While the 500 companies use to produce economic forecasts.7
jury is still out on the overall economic effects of This economic model, which covers FY 2011 to FY
Bush-era tax relief, these two
changes to tax policy, particularly the
2003 legislation, likely boosted eco- Obama Tax Plan Would Eliminate Hundreds of
nomic activity and strengthened the Thousands of Jobs Each Year
macro economy.2
Annual Change in Employment, in Thousands of Jobs
President Obama, however, has
advanced a tax plan that reverses this 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
3 0
tax policy. Rather than continuing the
pattern of tax reduction and reform,
the President and his supporters in
Congress and elsewhere are calling for –200
tax increases, primarily on upper-
income taxpayers and businesses.
Many of these individuals are small-
business owners, the primary job cre- –400
ators4 in the country, whose income
often fluctuates from year to year.5
These tax increases would add
approximately $1.8 trillion to govern- –600
ment revenues over the next 10 years,
of which more than half ($970 billion)
would come from upper-income tax-
payers.6 Enacting this tax plan would –800
have serious, adverse consequences
for economic activity, and sharply
lower the rate of economic growth. Average annual change, 2013–2019:
This would frustrate the President’s –1,000 799,000 jobs lost
effort to raise these new revenues. Source: Heritage Foundation calculations based on data from the IHS Global Insight U.S.
macroeconomic model.
Center for Data Analysis econo-
mists estimated the likely economic Chart 1 • CDA 10-07 heritage.org
and fiscal effects of the Obama tax
1. Jerry Tempalski, “Revenue Effects of Major Tax Bills,” U.S. Department of the Treasury OTA Working Paper No. 81,
September 2006, Table 2, p. 16.
2. Karel Mertens and Morten O. Ravn, “Understanding the Aggregate Effects of Anticipated and Unanticipated Tax Policy
Shocks,” Working Paper, October 15, 2009, at http://www.arts.cornell.edu/econ/km426/papers/anticipation_2009_theory.pdf
(September 13, 2010).
3. The President’s tax proposals can be found in Office of Management and Budget, Analytical Perspectives: Budget of the U.S.
Government, Fiscal Year 2011, pp. 170–189, at http://www.whitehouse.gov/sites/default/files/omb/budget/fy2011/assets/spec.pdf
(September 10, 2010).
4. Small businesses account for the majority of net jobs, and the vast majority of new net jobs, in the economy. See, for
example, Organisation for Economic Co-operation and Development (OECD), “Small Businesses, Job Creation and
Growth: Facts, Obstacles and Best Practices,” at http://www.oecd.org/dataoecd/10/59/2090740.pdf (September 14, 2010).
Also see William J. Dennis, Jr., Bruce D. Phillips, and Edward Starr, “Small Business Job Creation: The Findings and
Their Critics,” Business Economics (July 1994).
5. Gerald Auten and Geoffrey Gee, “Income Mobility in the United States: New Evidence from Income Tax Data,” National
Tax Journal (June, 2009).
6. Ibid., Table 14-3, pp. 185–189.
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2020, produced results that are displayed in • Investment in residences would also fall by an
Appendix 2 of this Report. The Obama tax plan average of $13 billion each year;
would result in:8 • Personal savings would decrease by $38 billion
• Slower economic growth: Inflation-adjusted in 2011 alone, and savings by Americans would
gross domestic product (GDP) would fall by a continue below baseline for each of the follow-
total of $1.1 trillion between FY 2011 and FY ing four years;
2020. GDP in 2018 would fall by $145 billion • Total disposable lost income after subtracting
alone. The growth rate of the economy would be inflation would equal $726 billion for the 10-
slower for the entire 10-year period. year period; and
• Fewer jobs: Slower economic
growth would result in less job
creation. Employment would fall Obama Tax Plan and the Economy: $1.1 Trillion Less
by an average of 693,000 per year
From 2011 to 2020, the Obama tax plan would reduce GDP by an
over this period: annual average of $111 billion.
– 238,000 fewer jobs in the crit-
Annual Change in GDP, in Billions of Inflation-Adjusted 2005 Dollars
ical economic recovery year
of 2011; 0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
7. This model of the U.S. economy is owned and maintained by IHS Global Insight, Inc., the leading economic forecasting
firm in the United States. The Global Insight model is used by private-sector and government economists to estimate how
changes in the economy and public policy are likely to affect major economic indicators. The methodologies,
assumptions, conclusions, and opinions presented here are entirely the work of analysts in the Center for Data Analysis at
The Heritage Foundation. They have not been endorsed by, and do not necessarily reflect the views of, the owners of the
Global Insight model. The authors refer many times in this paper to “the baseline” and “the forecast,” which means the
following: “The baseline” is the CDA forecast of the economic future without President Obama’s tax plan, while “the
forecast” is the economic future that contains the tax plan.
8. All dollars are inflation adjusted to 2005 levels unless otherwise noted.
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THE HERITAGE CENTER FOR DATA ANALYSIS
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otherwise often find themselves hurting those who more by higher taxes on labor and capital, the tax
they would otherwise work to protect. base will erode as taxpayers adapt their income to
President Obama and his supporters probably higher tax rates, and Congress will move further
recognize these indirect but enormously significant away from financial solvency. This paper describes
effects. It is highly unlikely that the President’s eco- those undesirable economic and fiscal outcomes.
nomic advisors fail to see the connection between Congress could take this historic moment of
rising taxes and slower economic growth. However, great fiscal challenge to lay a solid foundation for
these same advisors argue that the need for new rev- future fiscal solvency. Rather than inflicting pain-
enues outweighs the adverse effects of tax increases. ful tax increases on a sluggish economy, Congress
They have studied the growing difference between should reform the country’s tax code with the goal
outlays and inflows and have concluded that new of supporting stronger economic growth and cre-
revenues must be part of a financial plan to bring ating a simpler, less intrusive system of revenue
the federal budget closer to balance. After all, there collection. At the same time, Congress should
probably is a limit to how long the U.S. government take a first step toward meaningful entitlement
can rely on borrowing to meet its planned spending. reform. This step is crucial to prevent the oncom-
Further, efforts to substantially reduce spending ing tsunami of debt that the “debt-paying genera-
often meet insurmountable philosophical and polit- tion” will face if Congress does not get control of
ical obstacles. the greatest driver of federal spending: exploding
Even so, the President and his supporters cannot outlays for mandatory programs like Social Secu-
avoid the fact that the deficit problem is primarily rity, Medicare, and Medicaid.
located on the spending—not revenue—side of the THE HISTORICAL BACKGROUND
financial ledger. The Congressional Budget Office FOR THE OBAMA TAX PLAN
now expects federal government spending to equal
24.5 percent of the economy in 2011, its highest Some readers may wonder why Congress must
level since 1960.9 At the same time, a weak econ- now revisit tax policies put in place in 2001 and
omy with high unemployment is producing low 2003. After all, Congress reviews tax policy at least
levels of federal revenues, which likely will result in once every year. What is so historic about this year’s
a 2011 deficit of more than a trillion dollars. tax debate?
If current policies are continued throughout the Part of the answer to that question stems from
next 10 years, revenues will regain their historical how Congress passed the 2001 tax relief legislation:
average of 18 percent of GDP in 2016, and stand at Congress adopted special budget rules before the
18.2 percent of GDP in 2020. But spending is tax legislation’s enactment that allocated a fixed
expected to be 26.5 percent of GDP.10 If revenues amount of funds for tax relief. In addition, this so-
return to their historical levels following full recov- called reconciliation rule required that the tax law
ery from the recession, how can the gaping 2020 expire at the end of the tenth year after its effective
budget deficit be the result of anything other than date, which would be on January 1, 2011. It is not
higher than average spending? a peculiarity of this tax legislation that the law
expires in 10 years: Legislation adopted under bud-
The determination of how to address the fiscal get reconciliation routinely has a 10-year life, after
problem of the next decade is crucial to the current which Congress can vote to renew it.
debate over President Obama’s tax plan. That plan
assumes that the U.S. government has a revenue However, President George W. Bush began almost
problem, not a spending problem. If Congress immediately to call on Congress to make these tax
agrees, a weak economy will be burdened even cuts permanent, which Congress clearly could have
9. Congressional Budget Office, “The Budget and Economic Outlook: An Update,” August 2010, p. 4, Tables 1–2,
and U.S. Census Bureau, Statistical Abstract, “Table 457. Federal Budget—Receipts and Outlays: 1960 to 2009,”
at http://www.census.gov/compendia/statab/2010/tables/10s0457.pdf (September 10, 2010).
10. Brian M. Riedl, “New CBO Budget Baseline Shows that Soaring Spending—Not Falling Revenues—Risks Drowning
America in Debt,” Heritage Foundation WebMemo No. 2983, August 19, 2010, at http://www.heritage.org/Research/Reports/
2010/08/New-CBO-Budget-Baseline-Shows-that-Soaring-Spending-Not-Falling-Revenues-Risks-Drowning-America.
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2000.
The Great Recession dramatically changed the
nation’s revenue picture, as it did nearly everything
else related to the economy. However, the point is $1.5
this: Revenues after the major tax relief legislation 1997 2000 2005 2007 2010
between 2001 and 2005 flowed into Washington at Source: Congressional Budget Office, “The Economic and Budget
nearly the same rate that the CBO expected before Outlook: Fiscal Years 1998–2007,” January 1997 and “The Budget and
Economic Outlook: Fiscal Years 2008 to 2017,” January 2007.
any tax cuts were made. Congress was never starved
for revenue. Chart 3 • CDA 10-07 heritage.org
11. For an overview of the expiring provisions, see Curtis Dubay, “Obama’s Tax Plan: Bad for Economic Growth,” Heritage
Foundation Factsheet No. 68, July 13, 2010, at http://www.heritage.org/Research/Factsheets/Obama-s-Tax-Plan-Bad-for-
Economic-Growth. Congress passed the Tax Increase Prevention and Reconciliation Act in 2005 that extended the lower
tax rates on capital gains and dividend income originally set in 2003 through the end of 2010.
12. Rea S. Hederman and Patrick Tyrrell, “Obama Tax Hikes: Dividend Tax Increase Hurts Seniors and the Economy,”
Heritage Foundation Backgrounder No. 2460, September 9, 2010, at http://www.heritage.org/Research/Reports/2010/09/
Obama-Tax-Hikes-Dividend-Tax-Increase-Hurts-Seniors-and-the-Economy.
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1. Joint Committee on Taxation, “Description of Revenue Provisions Contained in the President’s Fiscal Year 2011
Budget Proposal,” August 16, 2010, at http://www.scribd.com/doc/36009224/Description-of-Revenue-Provisions-
Contained-in-the-President%E2%80%99s-Fiscal-Year-2011-Budget-Proposal (September 10, 2010).
2. The values reflect $200,000 for singles and $250,000 for joint filers minus personal exemptions and standard
deductions, indexed to 2009.
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THE HERITAGE CENTER FOR DATA ANALYSIS
13. The rates presented here are effective rates, which are lower than the (nominal) marginal rate that the taxpayer faces (for
example, 39.6 percent in the top bracket). The average effective tax rate is the percentage of annual income that a
taxpayer pays in tax, after all credits, deductions, and exemptions are taken into account. The effective marginal rate is
the amount paid on the next dollar after all credits, deductions, and exemptions are taken into account.
14. Scott A. Hodge, “News to Obama: The OECD Says the United States has the Most Progressive Tax System,” Tax
Foundation Tax Policy Blog, October 29, 2008, at http://www.taxfoundation.org/blog/show/23856.html (September 10, 2010).
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Source: Heritage Foundation calculations based on data from the IHS Global Insight U.S. macroeconomic model and the Center for Data Analysis
income tax model.
Table 2 • CDA 10-07 heritage.org
ers have dividend income, and these filers would increase for these middle-class seniors would be
see an average tax increase of $267. Nearly 20 per- $656 and $901 respectively. Overall, more than
cent of filers in the middle quintile and nearly 30 eight million tax returns are filed by seniors with
percent of filers in the fourth quintile have dividend qualified dividend income.15 Of course, for seniors
income, and the tax increase for these filers would in these middle-income categories that have both
be about $430 and $560, respectively. The percent- capital gains and dividends in their retirement port-
age of filers with capital gains income in the lower folio, the tax increase would be even greater.
quintiles is smaller, but for those with capital gains
income, even in the first three quintiles, the average HOW THE OBAMA PLAN WILL
tax increase would be much larger. AFFECT ECONOMIC ACTIVITY
Many seniors rely on capital gains or dividend Brief Description of the Dynamic Simulation.
income as part of their retirement plan. In fact, for The dynamic macroeconomic analysis conducted
many of these older tax filers, it is their primary by the Center for Data Analysis assumes that indi-
income source. Almost 40 percent of seniors in the viduals and businesses react to real-world changes
lowest income quintile have dividend income, and in income and costs. As a result, changes in eco-
23 percent have capital gains income. For the 50 nomic growth that reflect changes in income can
percent of seniors in the third quintile that have div- lead to higher or lower tax receipts than under the
idend income, the tax increase would be a hefty static scoring.
$529 on average, and for the 23 percent with capital Tax changes also affect economic growth, largely
gains income it would be $763. Sixty percent of through the way they affect the cost of productive
seniors in the fourth quintile receive dividends and factors. Thus, a tax increase may slow down eco-
30 percent have capital gains income; the tax nomic activity by increasing factor costs, which in
15. Hederman and Tyrrell, “Obama Tax Hikes: Dividend Tax Increase Hurts Seniors and the Economy.”
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16. See Appendix 2: Macroeconomic Analysis for a detailed description of the assumptions made in constructing the adjusted
baseline.
17. See Appendix 2: Macroeconomic Analysis for a detailed description of the simulation procedure used in this analysis.
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18. William M. Gentry, “Capital Gains Taxation and Entrepreneurship,” Williams College, Preliminary Draft, January 2010,
at http://www.law.northwestern.edu/colloquium/tax/documents/CapGainsEntre.pdf (September 10, 2010).
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19. The Tax Policy Center (TPC) statically estimates a $68-billion-a-year reduction in budget deficits. Dynamically, deficits
will only be about $49 billion less in the first year (before many adjustments can be made). These reductions to the deficit
are quickly diminished, and by 2015 deficits actually begin to increase. See Adam Looney, “The Debate Over Expiring
Tax Cuts: What About the Deficit?” Tax Policy Center, August 12, 2010, p. 3, at, http://www.taxpolicycenter.org/
UploadedPDF/1001438-tax-cuts-debate.pdf (September 10, 2010).
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METHODOLOGICAL APPENDICES
APPENDIX 1:
MICROECONOMIC METHODOLOGY
Changes to the individual income tax code were These policy changes were run together as a sin-
simulated using the Center for Data Analysis (CDA) gle simulation to allow interactions between them.
Individual Income Tax Model in order to estimate This simulation was then compared with a simula-
effects on tax revenue and the distribution of the tion of current policy. Both simulations included
resulting tax burden and to compare these effects to recent tax changes such as:
current policy estimates. • The new Making Work Pay credit;
The CDA tax model simulates the effect of tax law • Scheduled “patches” and changes in the alterna-
changes on a representative sample of taxpayers tive minimum tax (AMT) and education credits
based on IRS Statistics of Income (SOI) taxpayer (Hope, Lifetime Learning, and the American
microdata. Data for these taxpayers are extrapolated Opportunity tax credit); and
or “aged” to reflect detailed taxpayer characteristics
through 2016. The data are aged for consistency • Tax increases that accompany the recently passed
with the Congressional Budget Office (CBO) base- health care bill. The Medicare Hospital Insurance
line forecast in order to produce effective and mar- tax is increased by 0.9 percentage point and
ginal tax rate estimates with which to forecast applied to capital gains income for those with
dynamic effects of the changes in tax burden. incomes above $250,000 (joint filers) or $200,000
(all others), and itemized deductions for out-of-
Two simulations were run for comparison: cur- pocket medical expenses are limited to expenses
rent policy extended forward through 2016, and above 10 percent of adjusted gross income (AGI).
the proposed tax increase on upper-income filers by The current threshold is 7.5 percent.
the reversal of the 2001 and 2003 reduced top mar-
ginal rates. The tax increase includes a return of the For each simulation, average effective tax, mar-
39.6 percent, 36 percent, and 28 percent brackets ginal effective tax rates, and revenue were calculated
for a total of six brackets (10 percent, 15 percent, 25 for use in the macroeconomic model. Tax burdens
percent, 28 percent, 36 percent, and 39.6 percent); for demographic groups were determined based on
the treatment of dividends as regular income, sub- the simulated filing status and taxpayer informa-
ject to those six brackets; a return of the 20 percent tion. Non-farm businesses were defined as those tax
capital gains bracket; and the return of the phase- filers that reported other-than-zero business income
out for itemized deductions and personal exemp- through Schedule C or as a partnership or S-Corp
tions (PEP and Pease). through Schedule E.
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THE HERITAGE CENTER FOR DATA ANALYSIS
20. The IHS Global Insight July 2010 short-term model forecast makes the best possible estimate of likely future law. Thus,
the simulation first involved adjusting this baseline forecast to a close approximation of current policy (extending all
current policies). This was done by reverting assumptions in the July 2010 forecast that relate to likely policy changes in
the next 10 years. These assumptions were obtained from conversations with IHS Global Insight staff. The
methodologies, assumptions, conclusions, and opinions in this CDA Report are entirely the work of CDA analysts; they
have not been endorsed by and do not necessarily reflect the views of the owners of the IHS Global Insight model. The
model is used by leading government agencies and Fortune 500 companies to provide indications to decision makers of
the probable effects of economic events and public policy changes on hundreds of major economic indicators.
21. This adjustment still allows the changes made to the effective personal income tax rate due to the tax credits in the health
care reform law, which take effect in 2014. The GI July 2010 short-term model assumes that the health care tax credits
will reduce this rate each quarter starting in 2014 and this change is not removed in the adjusted baseline.
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since this model assumes an increase of approxi- Average Effective Personal Tax Rates. The average
mately $32 billion to $33 billion per year from 2011 effective federal personal income tax rate (RTXPGF)
to 2020 due to the renewal of the estate tax. While was changed by the percent change that was esti-
there is a seasonal pattern in the revenue adjust- mated by the microsimulation (see Appendix 1).
ment—primarily reflecting the difference in timing Labor Participation Rates. Changes in marginal
between cash receipts in the unified budget personal tax rates alter the after-tax return on the
accounts and tax accruals in the National Income marginal dollar of labor income. Microeconomic
and Product Accounts (NIPA)—there is no assumed theory suggests that increases in the marginal after-
seasonal variation on the estate tax receipts. tax return on labor also increase the incentive to
Description of the Macroeconomic Simula- work and, therefore, labor force participation. In
tion. The IHS Global Insight short-term model is other words, taxes on labor affect labor-market
largely an econometrically estimated model of the incentives. Aggregate labor elasticity is a measure of
U.S. economy which combines both demand-side the response of aggregate hours to changes in the
(Keynesian) and supply-side features. after-tax wage rate. These are larger than estimated
Because the tax policy will largely have its effect micro-labor elasticities because they involve not
through changes in decisions affecting the supply only the intensive margin (more or fewer hours),
side first, CDA analysts made assumptions on inter- but also, and even more so, the extensive margin
est-rate variables in the simulation to incorporate (expanding the labor force).24 The change in the GI
these initial supply-side effects of the model on variable measuring the average work week (in hours)
investment and capital costs.23 Changes in capital was estimated using a macro-labor elasticity of 0.10.
costs will drive the supply-side changes in level In addition, the simulation modeled how changes
(and rate) of investment, which allows the model to in personal income tax rates would affect work
adjust and estimate the effects of the type of policy incentives by estimating the amount that the labor
considered. force participation rate in the model would change
The macro simulation made changes to the vari- in response to the individual income tax rate
ables that would be directly affected by the Presi- changes in the President’s plan. The GI variables
dent’s tax plan. The following outlines the changes measuring the estimated labor force (ages 16 to 64;
to the GI variables that could be captured in the GI and 65 and older) are stochastic variables in the
model relating to the President’s tax plan: model. In order to capture feedback effects in the
model—the tax rate changes as part of the President’s
Average Marginal Tax Rates. In the macroeco- plan would likely alter man-hours due to labor
nomic model, overall average marginal tax rates demand and supply interactions (due to changes in
were changed by the amount simulated by the optimal capital and labor ratios, for example)—the
microsimulation tax model for individual filers (see add factor of two GI variables measuring the labor
Appendix 1). CDA analysts adjusted the GI variable force (NLFC15T64 and NLFC65A) were adjusted
(RTXPMARGF) that directly measures the average by the direct elasticity effect so that the variables
federal marginal income tax rate using percent could still be affected by other indirect effects.
changes from the baseline instead of the actual esti-
mate to minimize biases in the estimate due to Capital Costs and Estate Tax. In the GI model,
slightly different baseline values between the micro this tax is part of the unified budget revenues but it
and macro models. is not counted in the NIPA for government receipts.
22. The adjusted baseline uses baseline projection values for average federal marginal tax rates estimated by the CDA
personal income tax microsimulation model. This tax microsimulation model provides estimates of annual tax rates
through 2016, so the adjusted baseline incorporates these baseline values and then flatly extends the 2016 rate through
the end of the forecast series (2020 Quarter 4).
23. Congressional Budget Office, “How CBO Analyzed the Macroeconomic Effects of the President’s Budget,” CBO Paper, July
2003, p. 34, at http://www.cbo.gov/ftpdocs/44xx/doc4454/07-28-PresidentsBudget.pdf (September 10, 2010).
24. For discussion and estimations, see Richard Rogerson and Johanna Wallenius, “Micro and Macro Elasticities in a Life
Cycle Model with Taxes,” Journal of Economic Theory, Vol. 144, No. 6 (November 2009), pp. 2277–2292, and Riccardo
Fiorito and Giulio Zanella, “Labor Supply Elasticities: Can Micro Be Misleading for Macro?” Working Paper, August 19,
2009, at http://works.bepress.com/cgi/viewcontent.cgi?article=1000&context=riccardo_fiorito (September 10, 2010).
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THE HERITAGE CENTER FOR DATA ANALYSIS
Therefore, an adjustment variable (GFRCPTUNI- to allow the model to estimate the indirect effects
ADJ) in the model reconciles the two government correctly, the direct effect on corporate interest rates
revenue variables. The amount added to the NIPA was changed for the simulation. This capital cost-
accounts for estate-tax revenue in the adjusted base- adjustment was made by assuming an increase in the
line was obtained from IHS Global Insight. GI variable that tracks the yield on AAA-rated corpo-
The model does not “know” that this revenue rate bonds as well as the GI variable that tracks the
increase is due to extension of the death tax. In order yield on the 10-year Treasury notes.25
25. James M. Poterba, “Estate Tax and After-Tax Investment Returns,” in Joel M. Slemrod, ed., Does Atlas Shrug? (Cambridge,
Mass.: Harvard University Press, 2000).
16
How the Obama Tax Plan Would Affect Key Economic Indicators
Average
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011–2020
Gross Domestic Product (in Billions of Inflation-Adjusted Dollars Indexed to the 2005 Price Level)
Forecast 13,744 14,177 14,587 15,037 15,479 15,949 16,389 16,834 17,313 17,825 15,733
Baseline 13,784 14,249 14,676 15,143 15,601 16,084 16,532 16,978 17,450 17,942 15,844
Difference –40 –72 –89 –106 –122 –136 –143 –144 –137 –117 –111
17
Disposable Personal Income (in Billions of Inflation-Adjusted Dollars Indexed to the 2005 Price Level)
Forecast 10,354 10,598 10,817 11,285 11,767 12,264 12,715 13,156 13,649 14,208 12,081
Baseline 10,430 10,686 10,909 11,373 11,852 12,349 12,795 13,225 13,698 14,221 12,154
Difference –75 –88 –92 –88 –86 –86 –80 –69 –49 –13 –73
Disposable Income Per Capita (in Inflation-Adjusted Dollars Indexed to the 2005 Price Level)
Forecast 32,992.98 33,445.24 33,809.05 34,934.90 36,076.04 37,241.42 38,244.45 39,198.04 40,284.93 41,541.45 36,776.85
Baseline 33,232.58 33,723.67 34,096.14 35,205.88 36,338.44 37,502.30 38,485.72 39,404.83 40,428.44 41,579.82 36,999.78
Difference Per Person –239.61 –278.43 –287.09 –270.98 –262.40 –260.87 –241.27 –206.79 –143.51 –38.37 –222.93
Difference for Family of Four –958.42 –1,113.73 –1,148.36 –1,083.92 –1,049.60 –1,043.50 –965.08 –827.15 –574.03 –153.48 –884.32
Personal Consumption Expenditures (in Billions of Inflation-Adjusted Dollars Indexed to the 2005 Price Level)
Forecast 9,719 9,972 10,167 10,428 10,756 11,094 11,400 11,703 12,036 12,419 10,969
Baseline 9,755 10,033 10,239 10,507 10,841 11,183 11,489 11,787 12,106 12,463 11,040
Difference –36 –60 –71 –79 –85 –89 –89 –84 –70 –44 –71
Personal Savings (in Billions of Inflation-Adjusted Dollars Indexed to the 2005 Price Level)
Forecast 309 288 288 472 597 728 854 977 1,122 1,281 692
Baseline 347 314 308 479 597 725 845 964 1,102 1,254 693
Difference –38 –26 –19 –8 0 3 8 14 20 28 –2
Gross Private Domestic Investment (in Billions of Inflation-Adjusted Dollars Indexed to the 2005 Price Level)
Forecast 1,877 2,111 2,312 2,445 2,517 2,619 2,682 2,750 2,833 2,923 2,507
Baseline 1,894 2,144 2,346 2,489 2,568 2,675 2,741 2,810 2,893 2,980 2,554
Difference –17 –33 –33 –44 –51 –56 –59 –60 –60 –58 –47
Non-Residential Fixed Investment (in Billions of Inflation-Adjusted Dollars Indexed to the 2005 Price Level)
Forecast 1,434 1,565 1,710 1,814 1,881 1,948 2,015 2,084 2,163 2,247 1,886
Baseline 1,440 1,586 1,735 1,844 1,916 1,987 2,056 2,126 2,207 2,291 1,919
Difference –6 –21 –24 –30 –35 –39 –41 –42 –43 –43 –33
0
Residential Fixed Investment (in Billions of Inflation-Adjusted Dollars Indexed to the 2005 Price Level)
Forecast 400 496 551 587 597 613 618 619 622 627 573
Baseline 405 504 561 598 611 629 634 636 640 644 586
Difference –5 –7 –10 –12 –14 –16 –17 –17 –17 –17 –13
THE HERITAGE CENTER FOR DATA ANALYSIS
Change in the Stock of Business Inventories (in Billions of Inflation-Adjusted Dollars Indexed to the 2005 Price Level)
Forecast 47 54 56 51 46 64 57 56 59 62 55
Baseline 52 59 56 53 48 66 58 57 58 60 57
18
Difference –5 –5 1 –2 –2 –2 –1 0 1 2 –1
Full-Employment Capital Stock (in Billions of Inflation-Adjusted Dollars Indexed to the 2005 Price Level)
Forecast 14,845 15,150 15,573 16,053 16,535 17,003 17,484 17,975 18,485 19,014 16,812
Baseline 14,848 15,184 15,642 16,155 16,670 17,168 17,676 18,193 18,726 19,277 16,954
Difference –2 –34 –69 –103 –135 –165 –192 –218 –241 –263 –142
Unified Federal Spending (in Billions of Dollars Not Adjusted for Inflation)
Forecast 3,577 3,576 3,740 4,000 4,291 4,612 4,927 5,317 5,775 6,331 46,147
Baseline 3,579 3,578 3,736 3,989 4,273 4,585 4,893 5,271 5,712 6,245 45,862
Difference –2 –2 4 12 19 26 34 46 63 86 285
Unified Federal Surplus/Deficit (in Billions of Dollars Not Adjusted for Inflation)
Forecast –1,104 –988 –844 –969 –1,099 –1,269 –1,410 –1,584 –1,805 –2,060 –13,132
Baseline –1,153 –1,021 –870 –981 –1,099 –1,264 –1,398 –1,562 –1,769 –2,007 –13,124
Difference 50 33 26 12 0 –6 –12 –22 –36 –53 –7
Federal On-Budget Surplus/Deficit (in Billions of Dollars Not Adjusted for Inflation)
Forecast –898 –810 –673 –773 –894 –1,021 –1,112 –1,229 –1,385 –1,589 –10,383
Baseline –950 –850 –706 –794 –905 –1,030 –1,115 –1,223 –1,365 –1,549 –10,487
Difference 53 39 34 21 11 9 4 –6 –21 –40 104
Privately Held Federal Debt (in Billions of Dollars Not Adjusted for Inflation) Average
2011–2020
19
Forecast 10,043 11,038 11,923 12,822 13,863 15,053 16,399 17,906 19,614 21,575 15,024
Baseline 10,080 11,116 12,031 12,945 13,989 15,176 16,513 18,003 19,681 21,596 15,113
Difference –37 –78 –108 –123 –126 –124 –114 –97 –67 –21 –89
Source: Heritage Foundation calculations based on data from the IHS Global Insight U.S. macroeconomic model. See methodology for details.
Appendix Table 1 • CDA 10-07 heritage.org
THE HERITAGE CENTER FOR DATA ANALYSIS