The American taxpayer won’t see an increase in individual income tax rates for another two years. That’s the good news in the tax deal reached by the GOP and the White House this week. According to The Heritage Foundation’s Center for Data Analysis, the President’s complete wish list of tax increases would have cost the economy 693,000 jobs per year, while reducing gross domestic product by $1.1 trillion cumulatively over the period 2011-2020.
But some higher taxes will hit in 2011, notably the estate tax, which was zero in 2010 but scheduled to rise to 55 percent in 2011. The GOP-White House deal pegs the rate at 35 percent instead. To understand the problems with the estate tax, read Curtis Dubay’s paper “The Economic Case Against the Death Tax.” As Dubay points out, the death tax is a tax on capital, and its very existence encourages people to consume instead of invest, which reduces job creation and suppresses productivity—and therefore wages. Keeping the death tax at zero could produce up to 1.5 million additional jobs.
Beyond that, the main problem with the deal is that its temporary nature preserves uncertainty about future tax rates, and it is that very uncertainty to which many folks attribute the sluggishness of economic recovery. Dan Mitchell of the Cato Institute even worries that the temporary nature of the package will make low taxes seem ineffective at boosting the economy and thereby undermine the case for lower taxes.
(Heritage Foundation intern John Vajas wrote this post.)