The taxman cometh: higher taxes in 2011 will retard economic growth

Other legislation related to healthcare reform will also exacerbate the tax burden.
Beginning in 2013, Medicare levies would extend their 3.8 percent charge from payrolls to unearned income in wealthier households, including income from dividends, interest, capital gains, annuities, and rents, but not tax-exempt interest or retirement accounts.
Also beginning in 2013, a Medicare surtax of 0.9 percent will extend to all couples with annual incomes of more than $250,000 and singles with annual incomes above $200,000.

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Moreover, after 2012, medical expenses would have to exceed 10 percent of income to qualify for a tax deduction. Currently, the threshold is 7.5 percent of income. Senior citizens will have to wait until 2016 for this new rule to apply to them.

“Fees also would apply to businesses that provide health plans that are too lavish or not generous enough,” Ezrati said.
“New rules would limit how much firms could provide on health care flexible spending accounts.”

The law also will limit the amount small businesses can expense. Previously, they could write off as much as $250,000 on new equipment purchases. The new limit will drop to $25,000.”

“It seems fairly clear, for instance, that investors will take what capital gains they can this coming December to avoid the higher taxes starting in 2011,” Ezrati stated.
“The initial selling pressure will likely drive down stock prices in December, and likely pick them up again in January, as investors reestablish their portfolios. But a wild January effect aside, most agree that the heightened tax burdens will more fundamentally detract from the flow of spending and the general dynamism of the economy.”

In fact, Ezrati espouses, there is evidence that the retarding influence has already begun, as businesses, mostly small businesses, are resistant to hiring or any other sort of expansion until they can assess the new costs of doing business.

“Households, too, especially wealthier households, must already have restrained spending to set funds aside for future, higher tax obligations,” he added.

Ezrati cites a paper written by Christina Romer (the former chairman of the Council of Economic Advisors) and her husband David, which determined that a “tax increase of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent.”

Since the Congressional Budget Office (CBO) estimates next year’s tax hike at $115 billion and the White House projects 2011 GDP at $15.299 trillion, the increase amounts to some 0.8 percent of GDP, which, according to the Romers’ formula, would shave some 2.0 percentage points off the economy’s real growth rate.

“Though the longer haul offers more tax hikes, they are less dramatic, and so the drag on growth likely will dissipate slowly in the out years,” Ezrati postulates. “If, then, the typical recovery generates between 4.5–5 percent real growth at this comparably early stage in the cycle, these tax hikes alone will likely hold growth closer to 2.75 percent, quite apart from the other, growth-retarding influences operating in this recovery.”