Laura Tyson headed the President’s Council of Economic Advisers in the Clinton administration. After leaving that post, she completed research that showed tax increases decrease economic growth. Specifically, she found a tax increase equal to 1 percent of gross domestic product (GDP) would decrease economic growth by 3 percent.
She has been back in the headlines recently explaining that the government’s fiscal policies could reduce GDP by 1.25 percent this year, but the headlines are focused on sequestration, which is only 40 percent of the story.
Fiscal policy includes not only spending cuts mandated by sequestration, but also tax hikes implemented under the fiscal cliff deal. While sequestration is being blamed for causing an economic catastrophe, it is the tax hikes that will do the most damage this year, according to Tyson.
As several news sites have noted, Tyson wrote sequestration will “trim at least 0.5 percentage point from GDP growth.”
Several paragraphs later, in Tyson’s actual analysis, she adds, “these cuts, along with the tax increases agreed to in January, would knock about 1.25 percentage points off 2013 GDP growth.”
Doing the math, tax hikes President Barack Obama insisted on will reduce economic growth by 0.75 percent this year. If sequestration will reduce employment by 1 million jobs, as many analysts claim, the tax hikes could reduce employment by another 1.5 million jobs.
A balanced approach that includes tax increases to reduce the deficit will do more harm than budget cuts. Short-term pain from cuts will eventually fade, while tax hikes will have a permanent adverse impact on growth.
The lesson from the preeminent economist of the Clinton era is that tax increases will destroy jobs and slow the economic recovery.
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