What Hillary Clinton’s tax plan would really do to the economy

Published 1:30 am Thursday, October 13, 2016

By Max Ehrenfreund

The Washington Post

Donald Trump issued a dire warning about his Democratic opponent’s proposals on taxes in Sunday’s town-hall debate. “Hillary Clinton is raising your taxes, folks,” Trump said. “She’s raising your taxes really high, and what that’s going to do is a disaster for the country.”

Yet even economists who are critical of Clinton suggest that might have been going too far. Taxes would increase substantially for only a few Americans, and the overall effects on the economy would be minimal, said Alan Cole, an economist at the Tax Foundation, which published a new analysis of Clinton’s plans on Wednesday.

“‘Disaster’ is probably not the right word for it,” Cole said. “It’s still very much within the bounds of what the United States already looks like.”

Notably, the foundation is usually skeptical of proposals to increase taxes. Wednesday’s report does predict some negative effects in the labor market and the broader economy from Clinton’s proposals. The general conclusion, however, is that Clinton is proposing modest changes that would likely have few tangible consequences – an analysis that is at odds with Trump’s rhetoric.

The foundation often predicts major economic gains from tax relief intended to reward Americans for working, saving and investing. Clinton’s plan would do the opposite, increasing taxes on businesses and investments.

According to the analysis, her plan would reduce the size of the economy by about 2.6 percent over a decade, relative to current projections. And most of that reduction would result from her proposal to expand the estate tax, which is imposed on wealthy families at death, and to impose a minimum tax of 30 percent on taxpayers with incomes above $1 million. The increased taxes would discourage wealthy Americans from investing their money, the foundation argues, holding back the entire economy.

As a result, the foundation projects, Americans’ average incomes would decline slightly regardless of how wealthy they are, even though Clinton is reducing average taxes for four-fifths of the population.

The foundation has received criticism in the past from economists who believe that its analyses exaggerate the economic effects of taxing the rich. With Clinton’s plan, however, the forecast changes – a 2.6 reduction over 10 years – are minor enough in any case that these disputes over methodology are arguably academic.

Most Americans would not notice that kind of shift in the economy, Cole said. Reduced investment might cause fewer employers to hire. Rather than widespread unemployment, a more likely result would be parents whose spouses are their families’ breadwinners choosing part-time over full-time work. “It’s not a fundamental transformation,” Cole said.

The labor market would continue to expand under Clinton’s plan, Cole said, but at a somewhat reduced pace. After 10 years, about 700,000 fewer Americans would be working full time relative to current projections, the analysis forecasts. By comparison, employers are currently adding about 180,000 positions to payrolls each month.

Crucially, the figures also do not take into account what Clinton would do with the money raised by the new taxes. Investments in transportation and education could stimulate the economy and cancel out any negative effects, according to Cole. “The cost of the tax increases could be worth it if that money is wisely spent,” he said.