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Ernst & Young LLP
July 2012

Long-run Macroeconomic Impact of Increasing Tax Rates on High-income Taxpayers in 2013
http://www.nfib.com/LinkClick.aspx?fileticket=OMV7uZczVaM%3D&tabid=1083

Executive Summary
...This report examines four sets of provisions that will increase the top tax rates:

The increase in the top two tax rates from 33% to 36% and 35% to 39.6%.

The reinstatement of the limitation on itemized deductions for high-income taxpayers (the “Pease” provision).

The taxation of dividends as ordinary income and at a top income tax rate of 39.6% and increase in the top tax rate applied to capital gains to 20%.

The increase in the 2.9% Medicare tax to 3.8% for high-income taxpayers and the application of the new 3.8 percent tax on investment income including flow-through business income, interest, dividends and capital gains.

With the combination of these tax changes at the beginning of 2013 the top tax rate on ordinary income will rise from 35% in 2012 to 40.9%, the top tax rate on dividends will rise from 15% to 44.7% and the top tax rate on capital gains will rise from 15% to 24.7%.

These higher tax rates result in a significant increase in the average marginal tax rates (AMTR) on business, wage, and investment income, as well as the marginal effective tax rate (METR) on new business investment. This report finds that the AMTR increases significantly for wages (5.0%), flow-through business income (6.4%), interest (16.5%), dividends (157.1%) and capital gains (39.3%). The METR on new business investment increases by 15.8% for the corporate sector and 15.6% for flow-through businesses.

This report finds that these higher marginal tax rates result in a smaller economy, fewer jobs, less investment, and lower wages. Specifically, this report finds that the higher tax rates will have significant adverse economic effects in the long-run: lowering output, employment, investment, the capital stock, and real after-tax wages when the resulting revenue is used to finance additional government spending.

Long-run macroeconomic impact of increasing tax rates on high-income taxpayers in 2013

Through lower after-tax rewards to work, the higher tax rates on wages reduce work effort and labor force participation. The higher tax rates on capital gains and dividend increase the cost of equity capital, which discourages savings and reduces investment. Capital investment falls, which reduces labor productivity and means lower output and living standards in the long-run.

Output in the long-run would fall by 1.3%, or $200 billion, in today’s economy.

Employment in the long-run would fall by 0.5% or, roughly 710,000 fewer jobs, in today’s economy.

Capital stock and investment in the long-run would fall by 1.4% and 2.4%, respectively.

Real after-tax wages would fall by 1.8%, reflecting a decline in workers living standards relative to what would have occurred otherwise.

These results suggest real long-run economic consequences for allowing the top two ordinary tax rates and investment tax rates to rise in 2013. This policy path can be expected to reduce long-run output, investment and net worth.

...the new 3.8 percent tax on investment income including flow-through business income, interest, dividends and capital gains.

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Since Gov Romney did not take a salary for the 2002 Olympics gig or the Mass Gov gig, it is possible/probable that he only has these four types of income - which until now have been treated separately, and at a lower rate than earned income with all its FICA obligations.

He, his wife, his accountants, and his close advisers are definitely smart enough to foretell how the dems would sell these different tax rates as “loopholes.” Or worse - felonious tax evasion.

Nevermind the amount of money in the checks he has sent to the IRS each year, because of his large net income!