Study says Obama tax proposals could cost 700,000 jobs—Boehner pounces

Republican House Speaker John Boehner hammered President Barack Obama on Tuesday after accounting firm Ernst and Young released a study funded by pro-business groups hostile to the Democrat's agenda. The firm's results showed that Obama's proposed tax hikes on the wealthy could cost the already sputtering economy more than 700,000 jobs.

"Our economy is still struggling under President Obama's policies, and his massive tax hike will only make things tougher," Boehner said in a statement. "It's one of the worst possible ideas at one of the worst possible times for families and small businesses."

Obama has been campaigning on calls to extend the Bush-era tax cuts on income up to $250,000 but let them expire above that level. He and fellow Democrats have accused Republicans of holding middle-class tax relief hostage to help the very rich (in fact, the wealthy would see the benefits on their first $250,000 of income). Recent polls have suggested that the public broadly supports the president in principle, though Republicans have noted that his proposal does not yet exist as legislation, and Democrats are expected to water down some of the president's recommended changes.

The Ernst and Young study looked at the impact of seeing the top marginal tax rates rise—but also studied the effects of a range of other proposals included in the president's budget and broader tax plans.

This report examines four sets of provisions that would increase the top tax rates:

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

· 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 percent and increase in the top tax rate applied to capital gains to 20 percent.

· The increase in the 2.9 percent Medicare tax to 3.8 percent 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.

Here is what the accounting firm concluded would happen:

· Output in the long-run would fall by 1.3 percent, or $200 billion, in today's economy.

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

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

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

Ernst and Young prepared the report on behalf of several pro-business groups, including the Independent Community Bankers of America, the National Federation of Independent Business, the S Corporation Association and the United States Chamber of Commerce. (One of the co-authors, Robert Carroll, served as deputy assistant secretary for tax analysis in George W. Bush's Treasury Department.) Asked for a formal response to the study, two White House officials declined to do so on the record.

But Rep. Sander Levin, the top Democratic member of the tax-writing House Ways and Means Committee, blasted the report.

"The study's bias is obvious, its methodology is flawed and its purpose is clear: Republicans are seeking every opportunity to repeat a tired and discredited claim about small businesses in an effort to protect the highest earners from contributing toward deficit reduction," Levin said in a statement.

"The fact is that extending the high-income tax cuts would cost $850 billion and it is far past time for Republicans to join with Democrats in asking the very wealthiest to contribute toward deficit reduction," Levin said.

One flaw, according to Levin: The report allows for two possible uses for the revenues generated by allowing the high-bracket tax cuts to lapse—more government spending, or returning the money to the public "through an across-the-board reduction in tax rates." But Levin said: "The president has made clear this revenue should be used for deficit reduction."

In his statement, Boehner underlined that the Republican-led House will vote this month to extend all of the Bush-era tax cuts and set the stage for a broader debate on overhauling the tax code.

"This report shows the president's small business tax hike threatens hundreds of thousands of jobs, and will lead to even less economic growth, less investment and lower wages for American workers," Boehner said.

UPDATE, 4:31 p.m.: This post has been updated with Rep. Levin's comments.