Incentives matter, even heroin addicts recognize this. Now my suspicion is the average American is at least as smart as the average heroin addict, but feel free to present the opposite case if you disagree. The net result of the American Taxpayer Relief Act of 2012 (the fiscal cliff bill) and Obamacare, the PPACA will be to incentivize less work and less investment.
The American Taxpayer Relief Act of 2012 introduces a variety of taxes that were advertised to make the "rich" pay their "fair share," but it also included the elimination of the 2% payroll tax holiday that results in a 2% tax increase on the first $113,700 in earnings for ALL wage earners. The net result of that will be reduced supply of labor since the higher taxes reduce the incentive to work, and it particularly lowers the incentive to work for lower income given the increased value of the safety net since 2009. This marginal tax rate increase and the continuation of emergency unemployment benefits pretty much guarantees a sluggish employment picture in 2013. The full force of Obamacare, the PPACA, guarantees continued sluggish job growth in 2014. Since we didn't go over the cliff our bet about the economy should be modified. If you want, we can modify that bet. I'll bet you the unemployment rate doesn't go much lower this year. But I digress.
The payroll tax increase is the first of the tax increases. The others:
1) Tax rates on taxable income over $400,000 for single filers, $450,000 married ($400,00/$450,000) increases from 35% to 39.6%.
2) Tax rates on capital gains and dividends for filers with taxable income over $400,000/$450,000 increases from 15% to 20%. It actually goes to 23.8% with tax increases from PPACA, and the PPACA may tax gains on the sale of houses as well (see below).
3) Pease and PEP limits on Adjusted Gross Income (AGI) of $250,000/$300,000. Pease is named after a person and limits deductions. PEP is the personal exemption phaseout, and phases out the personal exemption for filers with AGI above the threshold.
How the rich will respond is unknown, other than they will hire tax attorneys to minimize their tax bills. Since capital gains and dividends will still have a lower marginal tax rate than salaries and wages, one would expect the rich to shift compensation away from salaries and wages. To the extent owners pay their business expenses via the 1040, profits will decline, and result in some combination of lower savings, growth, investment and job creation.
This is my best guess for the increase in marginal tax rates (MTR) from the American Taxpayer Relief Act of 2012
AGI up to $150,000 MTR up 1.9% to 2.0%
AGI $150,000 to $200,000. MTR up 1.6% to 1.8% (more of this group's income comes from sources other than salaries and wages. They escape the increases on "unearned" income that hits higher income earners).
AGI $200,000 to $400,000. MTR up 1.0% to 1.3% (see explanation above)
AGI $400,000 to $500,000. MTR up 4.2%
AGI $500,000 and above MTR increases 6.6% to 7.2%.
Now you have argued incentives don't matter, or don't matter much for the rich, or it isn't reasonable to speak of reactions to incentives since not every person reacts in the exact same way to changing incentives and even the same person reacts to incentives differently due to changing circumstances. But even so, somehow heroin addicts respond to incentives and there is a rich corpus of studies demonstrating people respond quite rationally to changing incentives. You are on the lunatic fringe on this issue.
All to say, working became less attractive, so people will work less. Investing, for the "rich" became less attractive, but so did working, so how they react is not known. Maybe they will invest more and work less, or work more and invest less. Lower work, lower investment is not good for the economy, nor our children, who still have to pay for our generosity to ourselves.
The PPACA also incentivizes less work and investment. Beginning this year
1) the health care deduction limit increases from 7.5% of AGI to 10.0%
2) there is a Medicare wage surtax of 0.9% on wages above $200,000/$250,000
3) there is a Medicare unearned income surtax of 3.8% on dividends, rent, capital gains, annuities, partnerships, house sales (I think) when AGI exceeds $200,000/$250,000. It will be quite interesting to hear the howls if capital gains from house sales are taxed. Tax laws have allowed sellers to roll-over gains. That may not be the case anymore.
4) limit to $2,500 flex spending account deductibility.
I'm sure there are others.
There are also employer penalties if health coverage is not provided by companies of a certain size, which will incentivize companies on that margin to retard growth. There's an interesting study of French firm sizes that is telling.
This is a graph from that study, showing the number of companies on the vertical and the number of employees on the horizontal. You can see the big discontinuity at 50 employees. That's when large increases in taxes and reporting takes place in France. We should expect the same to begin to develop in the US this year.
Source: Firm Size Distortion and the Productivity Distortion-Evidence from France by Garicano, Lelarge and Reenen.
Back to the impact on tax rates. The increase in MTR from the PPACA is about 1% for AGI starting around $200,000 and increases to almost 3% for earners with AGI over $10 million.
The increase in MTR from the American Taxpayer Relief Act of 2012 and the PPACA ranges from about 1.5% to 2% for under $200,000; 2% to 2.4% for earners with AGI between $200,000 and $400,000, and 5% to 10% for earners with AGI greater than $400,000.
All in all, a pretty big set of tax increases. Oh yea. And nothing has been done to reduce the deficit.
Now I know this is what you voted for, but tell me: is this what you voted for? and why? I can see it lowering employment and growth. I can see it does nothing for the deficit. You may think it will result in more taxes from the "rich" but experience tells us the rich will figure out ways to avoid and defer income so as to lower tax bills. Remember how our country began the deductibility of health insurance premiums: as a way for businesses to pay workers in non-monetary ways. There will be more of things like that. You seem to tacitly admit the PPACA won't lower costs, absent a totalitarian solution, and your only leg of support is the PPACA increases access, but it is becoming quite clear it does nothing of the sort. So again, is this what you voted for? Why?
Bill
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