Misinformation

The assertion that a modest increase in marginal tax rates for the wealthiest Americans would devastate business activity was repeated by Kevin Hasset and Alan Viard in the Wall Street Journal:

It's clear that business income for large and small firms will be hit by the higher tax rates. And in point of fact, firms of all sizes contribute to the nation's prosperity. So it's a mistake to focus only on the impact of increased tax rates on small business. But will the higher rates actually cause a significant reduction in business activity?

Economic research supports a large impact. A pair of papers by economists Robert Carroll, Douglas Holtz-Eakin, Harvey Rosen and Mark Rider that were published in 1998 and 2000 by the National Bureau of Economic Research analyzed tax return data and uncovered high responsiveness of sole proprietors' business activity to tax rates. Their estimates imply that increasing the top rate to 40.8% from 35% (an official rate of 39.6% plus another 1.2 percentage points from the restoration of a stealth provision that phases out deductions), as in Mr. Obama's plan, would reduce gross receipts by more than 7% for sole proprietors subject to the higher rate.

These results imply a similar effect on proprietors' investment expenditures. A paper published by R. Glenn Hubbard of Columbia University and William M. Gentry of Williams College in the American Economic Review in 2000 also found that increasing progressivity of the tax code discourages entrepreneurs from starting new businesses.

What's interesting about this so-called research is it isn't based on any real data. The first study made theoretical projections based on questionable assumptions about economic behavior. It was published at a time of robust job creation (late Clinton) followed by tax cuts that were accompanied by less robust job creation (Bush). The second study over-interprets the natural tendency of wealthy people to tell survey-takers they'd rather pay lower taxes. An intelligent wealthy person would not decline the opportunity to expand into a new profit-making enterprise, merely because the tax-rate on new profits would be slightly higher.

Of course economists like Paul Krugman have demolished these fallacies. Yet they keep popping up like praire dogs out of the hole.