Chuck Grassley: Tax Increases Would Cause More Unemployment

Raising taxes on upper earners is a bad idea.

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Chuck Grassley is a Republican senator from Iowa, ranking member and former chairman of the Senate Finance Committee.

Home sales. Private sector jobs and wages. Consumer spending. By almost every measure, the economy is in bad shape. Government intervention via stimulus spending and low interest rates hasn't done much to turn the economy around.

Yet the preferred approach by the administration and congressional allies is more of the same. They want to raise taxes on upper earners and use those proceeds to fund more government spending.

[See an Opinion slide show of 10 wasteful stimulus projects.]

This is a bad idea. People are eager for reliable, well-paying jobs. Entrepreneurship provides those jobs. And entrepreneurs often pay taxes at the top marginal tax rates because they've worked their way up to those income levels.

Those who support raising taxes on upper-income taxpayers say the increases would affect only 2 to 3 percent of small businesses. But 3 percent doesn't tell us anything about how many jobs are at stake. The 3 percent figure treats a one-person hot dog stand the same as a 100-worker metal fabrication plant. More than 20 million workers are employed by those firms directly targeted by the higher marginal tax rates. These small business owners would see a 17 to 24 percent increase of their marginal tax rates.

[Read more about jobs and the economy.]

Small businesses are typically organized as flow-through entities, meaning the owner files his business taxes on his individual tax form. The small business income is taxed at the individual rates.

Fifty percent of all flow-through business income would get hit with the Democratic leadership's proposed tax rate increases. That's according to the nonpartisan Joint Committee on Taxation. If you own a 100-worker metal fabrication plant, and your taxes go up 17 to 24 percent, you'll likely stop hiring or lay off workers to compensate. Small businesses create 70 percent of new jobs, so it's disastrous for job creation to raise taxes on small businesses.

Another argument from opponents of tax relief is the loss of revenue to the federal Treasury would escalate the national debt, and the country can't afford that. What they don't say is tax increases would just fund more government spending.

After the 2001 and 2003 tax relief, more revenue came into the federal Treasury. The expanding economy helped reduce the annual budget deficit from $415 billion in 2004 to $167 billion in 2007.

Since after World War II, the percentage of federal government tax receipts, as a percentage of the gross domestic product, has averaged 18.2 percent.

Right now, because of the recession, it's a bit lower. In the late 1990s, because of the technology boom, it was a bit higher. But, overall, with slight variations, the 18.2 percent figure has held steady.

If the 2011 across-the-board tax hikes were stopped forever, the level of federal tax receipts would be about 19 percent going forward.

It's worth repeating: Even with current law in place, the level of federal tax receipts would exceed historic norms. The source is the official scorekeeper, the Congressional Budget Office.

So, the problem isn't insufficient taxation. The problem is excessive government spending. Projections are for long-term government spending to be about 24 percent of GDP. This greatly exceeds any historic norms we have had.

Democrats hoping for economic recovery before the election have had to face facts that the economy remains stalled. One of them said, "You can't wish it away. What is, is."

I agree we can't wish it away. But we can do something about it. And the first step is not raising taxes on employers and job creators.

Read why extending all of Bush's tax cuts is a bad idea, by Sander Levin, Democratic House member from Michigan and chairman of the Ways and Means Committee. 

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