The tax code has been fundamentally changed in the last few decades in ways favoring wealthy and high-income households (Pollack and Thiess 2011). The top marginal tax rate has fallen from 70 percent during the 1970s to 50 percent through most of the 1980s to 35 percent for the past decade. The tax rate on capital gains—income created from wealth rather than work—has fallen from 40 percent in the late 1970s to just 15 percent today. These preferential rates on unearned income undermine the principle of tax fairness that effective tax rates should rise with income, allowing Warren Buffett and Mitt Romney, for example, to pay a smaller share of their income in taxes than many middle-class households pay (Pollack 2012). Tax reform that closes tax breaks for and raises rates on high-income individuals is good policy because it shifts the distribution of taxes back toward those best able to shoulder the burden.

But that’s not the only benefit these tax policies would provide. They would also raise revenue, and at a time when the economy remains weak we can use this revenue to create jobs.

Over the past two years, Congress has largely ignored or paid scant attention to job creation and has instead directed its rhetoric, if not its actions, toward the budget deficit. This debate is more than just a distraction, it is also counterproductive: The economic policies we need to alleviate the ongoing jobs crisis—increased social safety net benefits, low-income tax credits, infrastructure investment, aid to states, etc.—generally result in higher deficits, at least in the short run. This is, in fact, exactly what we should do: Invest more in job creation, and finance the cost through additional borrowing.

But a misplaced opposition to higher near-term deficits need not preclude effective job creation policies, because Congress could simply use tax fairness reforms to pay for job creation policies. This combination has a number of virtues. First, tax increases on high-income households create very little drag on near-term economic growth. Because these households save a high share of each marginal dollar they receive, a high-income individual facing a tax increase will reduce his or her consumption in response, but by less than a lower- or middle-income earner facing the same tax increase. Second, by pairing job creation policies—which are temporary—with permanent tax changes, deficits would be reduced substantially over the medium and long term (which is what really matters). And finally, moving back toward full employment and increasing taxes on higher-income earners both push against the income inequality trends of the last few decades. (High unemployment also hurts employed lower- and middle-income workers because slack in the labor market reduces their ability to negotiate the real wage increases needed to keep inequality from growing.)

Progressive taxes to raise revenue

The Congressional Progressive Caucus’s Budget for All—which the EPI Policy Center helped develop and analyze—includes a number of tax policies that raise revenue while having only a minimal impact on the economy in the near term (Fieldhouse and Thiess 2012). This analysis examines the impact of four such policies that could be implemented in a way to promote job creation.

Cap the value of deductions at 28 percent: Itemized deductions and other tax expenditures that reduce taxable income are regressive because their value—which is equal to a filer’s marginal tax rate—rises with income. By capping the value of deductions at 28 percent, taxpayers with over $200,000 of income will still be able to take all the itemized deductions they want, but the value of their deductions will be no greater than the value enjoyed by middle-class taxpayers. This policy change would generate $333 billion in revenue over the next decade (see Table 1).

Raise tax rates on high earners: Not only has the top income tax rate been cut in half over the last 30 years, but also our tax system does a poor job of differentiating between high-income and really high-income individuals. All income above $380,000 is taxed at the same marginal rate, whereas the cutoff for the top marginal tax rate was roughly $3 million in the 1950s and $1 million in the 1970s (adjusted to current dollars). The policy proposed by the CPC incorporates President Obama’s proposal to allow the top two brackets to revert to their Clinton-era levels as well as Rep. Jan Schakowsky’s (D-Ill.) Fairness in Taxation Act (FTA), which would adopt five additional brackets, ranging from 45 percent for taxable incomes above $1 million to 49 percent for incomes above $1 billion. The FTA would also eliminate the preferential tax rates on capital gains and dividends. Overall, these proposals would generate roughly $1.5 trillion in revenue over the next decade.

Close corporate loopholes: The corporate income tax code contains tax loopholes and preferences that result in low revenues relative to historical levels, opportunities for tax evasion, and perverse incentives for overleveraging, offshoring, and using fossil fuels. Citizens for Tax Justice looked at 280 Fortune 500 corporations with combined pretax profits of $160 billion and found that 26 of them paid no income taxes in any of the last four years (Citizens for Tax Justice 2012). Adopting the reforms to the U.S. international tax system proposed in President Obama’s fiscal year 2013 budget—reforms that largely target international corporate tax avoidance—would raise $168 billion over the next decade.

Adopt financial transactions tax (FTT): The general purpose of the financial sector in the economy is to allocate capital and risk in a way that allows individuals and businesses to grow and prosper. In this way, the financial sector is only an intermediary, a sector that facilitates the growth of the rest of the economy but does not produce growth itself. Over the last 30 years, the financial sector has grown from 3.8 percent to 7.6 percent of the economy, yet this growth does not seem to have provided any commensurate benefits to the overall economy—if anything, the economy has underperformed during these 30 years compared with the three decades prior (Mishel and Bivens 2011). These trends suggest that much of the financial sector’s recent growth produces profits for itself without adding actual value to the economy or society. By levying a small tax on the sales of financial products, large sums of revenue can be raised in a progressive manner while dampening volatility and without distorting productive economic activity. The Congressional Progressive Caucus’s version of the FTT would raise $849 billion over the next decade.

Jobs impact of investing the new revenue

The potential jobs impact of moving toward a fairer and more progressive tax system, as described above, and dedicating the near-term proceeds to infrastructure investment or another form of economic stimulus with a similar economic impact is substantial.

Using standard macroeconomic modeling consistent with private- and public-sector projections, we estimate that fiscal support financed with these progressive tax provisions would boost employment by nearly 1.3 million jobs in 2013 and by over 1.8 million jobs in each year during 2014–2017. Table 1 summarizes the jobs impact for each year through 2017, and Tables 2–5 detail the state-by-state job impacts.

There would be a bonus impact of this investment policy for deficit reduction. The increase in growth and employment from the revenue-financed job creation measures would diminish the budget deficit as more workers pay taxes and less money is spent on automatic stabilizers (e.g., unemployment compensation and food assistance). Every dollar in increased economic activity is associated with roughly a $0.37 improvement in the budget deficit (Bivens and Edwards 2010).

Conclusion

The best economic policy would be job creation without any offsets, because in the near term a higher deficit is a net benefit to the economy. Perhaps the best illustration of this principle is Britain, which two years ago implemented a massive austerity package—and six months later its recovery stalled out. Over the past six quarters the British economy has not only failed to grow, it has contracted and lost jobs and is now back in recession, the first double-dip recession in roughly four decades.

But while increasing the deficit is preferable, it isn’t necessary. Pairing tax fairness reforms with job creation investment accomplishes two goals: It reduces inequality by ensuring progressivity in the tax code, and it makes everyone better off by creating jobs and expanding economic activity. And the extra revenue in the medium term and long term doesn’t hurt.

Appendix: Methodology for calculating jobs impact

The jobs impact of each policy was calculated by applying a multiplier to the fiscal impact in each year. The multipliers used were: investing in infrastructure investment, 1.44; capping deductions at 28 percent, 0.37; raising upper-income tax rates, 0.37; raising corporate tax revenue, 0.32; and adopting financial transactions tax, 0.39. Each of these multipliers are published by Mark Zandi at Moody’s Economy.com (Zandi 2011), although capping deductions and raising upper-income rates options use an average of two multipliers (0.35 for permanently extending the Bush-era tax cuts and 0.39 for permanently extending temporary capital gains and dividends tax cuts). These estimates assume that the economy has not returned to potential output by 2017, which is consistent with CBO projections (CBO 2012); this assumption implies elevated fiscal multipliers.

The state shares of the tax policy changes were calculated using state data on the distribution of taxpayers who make over $200,000, published by Citizens for Tax Justice (2008). The state shares of the infrastructure investments were calculated using each state’s share of national employment (Bureau of Labor Statistics 2012). We did not want to presume a certain state allocation of funds for three reasons: (1) different types of infrastructure would entail different allocations; (2) certain allocations, such as the transportation allocations, are currently being debated and will likely change soon; and (3) for some infrastructure areas, such as school construction, it isn’t clear what formula would be used.

It should be noted that each tax policy is scored against a current policy baseline in which current tax policies—including the Bush tax cuts—are extended. But if all four tax policies are implemented together, there may be interactions that are not captured in this analysis. For example, capping deductions against a baseline of higher marginal rates would bring in much more revenue than against a current policy baseline because, in the former scenario, the value of the deductions would be higher. In this instance, the interaction would cause this analysis to understate the actual aggregate revenue increase—and thus jobs impact—of the proposals.

References

Bivens, Josh, and Kathryn Edwards. 2010. Cheaper Than You Think: Why Smart Efforts to Spur Jobs Cost Less Than Advertised. Economic Policy Institute Policy Memo No. 165. http://www.epi.org/publication/pm165/

Bureau of Labor Statistics. 2012. “State and Metro Area Employment, Hours, and Earnings,” March 30. http://bls.gov/sae/

Citizens for Tax Justice. 2008. “Who’s Rich?” January 16. http://www.ctj.org/pdf/whosrich.pdf

Citizens for Tax Justice. 2012. “Big No-Tax Corps Just Keep on Dodging,” April 9. http://www.ctj.org/pdf/notax2012.pdf

Congressional Budget Office. 2012. The Budget and Economic Outlook: Fiscal Years 2012 to 2022. http://www.cbo.gov/publication/42905

Congressional Progressive Caucus. 2012. The Budget for All: Budget of the Congressional Progressive Caucus Fiscal Year 2013. http://grijalva.house.gov/uploads/Executive%20Summary%20FINAL.pdf

Fieldhouse, Andrew, and Rebecca Thiess. 2012. The Budget for All: A Technical Report on the Congressional Progressive Caucus Budget for Fiscal Year 2013. Economic Policy Institute Policy Center Working Paper. http://www.epi.org/publication/wp293-cpc-budget-for-all-2013/

Mishel, Lawrence, and Josh Bivens. 2011. Occupy Wall Streeters Are Right about Skewed Economic Rewards in the United States. Economic Policy Institute Briefing Paper No. 331. http://www.epi.org/publication/bp331-occupy-wall-street/

Pollack, Ethan. 2012. “Romney May Not Like Government, but He Loves Its Tax Subsidies.” Economic Policy Institute Working Economics [blog], January 19. http://www.epi.org/blog/mitt-romney-loves-tax-subsidies/

Pollack, Ethan, and Rebecca Thiess. 2011. “Taxes on the Wealthy Have Gone Down Dramatically,” Economic Policy Institute Economic Snapshot, April 14. http://www.epi.org/publication/taxes_on_the_wealthy_have_gone_down_dramatically/

Zandi, Mark. 2011. “At Last, the U.S. Begins a Serious Fiscal Debate.” Moody’s Analytics Dismal Scientist, April 14. http://www.economy.com/dismal/article_free.asp?cid=198972&src=msnbc