Economists split on whether tax hikes have hurt recovery

Analysts are split over whether the tax increases passed in January have hurt the economy as Congress barrels toward another round of fiscal fights this fall.

Eight months ago, Congress passed legislation to avoid the “fiscal cliff” that included a slew of tax hikes. Republicans predicted the tax increases would slow down the recovery, while Democrats argued the benefits of cutting the deficit would exceed negligible costs.

The parties still hold to those positions, and both sides have experts in their corner.

{mosads}Thomas Hungerford, a director of budget and tax policy at the left-leaning Economic Policy Institute, said the increases in income taxes have had “no impact” on the economy.

“I think any arguments that raising taxes at the top has probably lost some of its relevance,” Hungerford said.

But Douglas Holtz-Eakin, head of the American Action Forum and economic adviser during Sen. John McCain’s (R-Ariz.) 2008 presidential run, argued just the opposite.

“There’s no question that they have an impact,” the former Congressional Budget Office director said. “People made a fairly big deal out of the sequester, but I think the tax changes are way more important.”

Lawmakers spent much of the “fiscal-cliff” debate last year battling over the tax rates passed under former President George W. Bush. The parties ultimately struck a deal that allowed tax rates on the nation’s top earners to rise, while the Bush tax rates for the remaining earners were made permanent

On the income tax side, which was ground zero for much of the “fiscal-cliff” fight, the impact of the tax increase for families making more than $450,000 and individuals making more than $400,000 has been minimal, according to Kevin Logan, chief U.S. economist at HSBC.

“The effect on business activity and investment, which some people would argue is a negative of raising taxes, there it’s hard to discern any changes at all,” he said.

Where the “fiscal-cliff’s” tax hikes seem to be having the most measurable impact is on the budget deficit.

Combined with the automatic sequester spending cuts, the federal budget deficit is estimated to be $606 billion through July, down $368 billion from the same point one year ago. Tax revenue was up 14 percent in fiscal 2013, while cuts have dropped spending by 4 percent.

But Republicans say the tax increases are destroying jobs and warn Democrats are intent on passing more of them despite their negative impact on growth and employment.

In a twist to the fiscal cliff debate, the one tax increase that Democrats had warned would slow growth — the increase in the payroll tax to 6.2 percent — seems to have had little effect on the economy.

“People just keep spending, irrationally or otherwise,” said Michael Feroli, chief U.S. economist for JPMorgan.

Economists and liberal lawmakers had warned the payroll tax increase would fall harder on lower earners, giving them less money to spend in their paychecks and depressing spending.

But the Commerce Department reported earlier this month that consumer spending climbed 0.5 percent in June, its highest level in four months. And consumer spending hit its highest rate in a year during the first quarter of 2013, after the payroll tax hike began taking its toll.

Logan argued there has been a decline in spending activity due to the payroll tax increase, if slight.

“Can we see any effect of that? It’s hard, but yes,” Logan said. “It’s definitely ebbing over the last few months.”

More broadly, the economy is in a similar place to where it was in the summer of 2012, before the tax deal was struck. It’s still growing, if slowly, and the unemployment rate is falling, albeit at a languid pace.

The Commerce Department reported the economy grew 1.7 percent in the second quarter of the year. The unemployment rate dipped to 7.4 percent in July, down half a percentage point from the beginning of the year.

Feroli said the most important thing lawmakers could do for the economy now is increase the debt ceiling before credit markets are rattled or — most disastrously — the U.S. defaults on its debt.

“We just want to make sure the debt ceiling is raised in a timely manner,” said Feroli. “Most economists aren’t really expecting much of anything else.”

There’s also broad agreement among economists that, despite the push and pull over fiscal policy and continuing chatter in the Capitol about the need for tax reform, the current slate of policymakers is not likely to strike a broad fiscal accord anytime soon.

“We just see no laying of the groundwork for that,” said Holtz-Eakin.

Logan of HBC agreed that he doesn’t “see the path forward” for a broad deal on spending and taxes.

“All I see is fog and confusion and one continuing resolution after another,” he said.