The EPI issue brief A perfect match: Coupling tax fairness with job creation for a stronger economy calculated the national and state-by-state jobs impact of implementing a set of tax fairness proposals outlined in the Congressional Progressive Caucus’s Budget for All and dedicating the revenue to increased national infrastructure investment. It found that the four tax fairness policies would together create roughly 1.3 million jobs in fiscal 2013 and over 1.8 million jobs each year between fiscal 2014 and 2017 (Pollack 2012).

Similarly, this issue brief analyzes the employment impact of coupling job creating infrastructure investments with the Buffett Rule. Implementing the most widely supported legislation to apply the Buffett Rule, the Paying a Fair Share Act of 2012, would raise about $60 billion over the next five years and nearly $163 billion over a decade (Barthold 2012). This issue brief finds that adopting this tax provision and using the revenue to invest in the nation’s crumbling infrastructure would create about 43,000 jobs in 2013 and roughly 95,000 jobs per year from 2014 through 2017.

Background on the Buffett Rule

The current tax code favors many high-income taxpayers because, among other things, it taxes capital gains and dividends—income derived from existing wealth—at a lower rate than wages and salaries, which are derived from work. For this reason, average federal income tax rates actually peak at around $1 million in income, and then start falling as households collect a greater share of income from investments (Fieldhouse 2012). The preferential tax rate on capital gains and dividends is just 15 percent, well below the top 35 percent income tax on wages and salaries—which explains the low average tax rates paid by Warren Buffett and other multi-millionaire financiers. Indeed, nearly a quarter of all millionaires actually pay a smaller share of their income in taxes than millions of middle-class households (National Economic Council 2012).

The Buffett Rule would help correct this regressive aspect of the tax code. The most widely supported legislation that would implement the Buffett Rule, the Paying a Fair Share Act of 2012 (S. 2059), would require taxpayers with incomes above $1 million to pay at least 30 percent of their adjusted gross income (less charitable contributions) in federal taxes.

Job creation effects

Relative to current policy (which assumes that most tax policies scheduled to expire, such as the Bush-era tax cuts, are extended), this version of the Buffett Rule would raise about $60 billion over the next five years and around $163 billion over a decade (Barthold 2012). Implementing this tax provision and using the revenue to invest in the nation’s infrastructure would create nearly 43,000 jobs in 2013 and an average of 95,000 jobs per year from 2014 through 2017 (Table 1). This analysis predicts that job creation would occur in every state, even those with a disproportionately large share of high-income taxpayers (Table 2). For example, in 2013 this policy would create about 2,600 jobs in New York state and over 900 jobs in New Jersey, and more in the ensuing years.

Table 1 Revenue raised by implementing the Buffett Rule (S. 2059) and overall job impact* (2013−2017) 2013 2014 2015 2016** 2017** 2013–2017 2013–2022 Revenue (billions of dollars) 5.4 11.5 12.8 14.4 16.0 60.1 162.6 Job impact 42,756 87,420 91,543 97,008 102,291 * Assuming the revenue raised from the Buffett Rule is dedicated to infrastructure investments ** Assuming economy remains below full employment Source: Author's analysis of Citizens for Tax Justice 2008, Fieldhouse and Thiess 2012, and Bureau of Labor Statistics 2012 Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image

Table 2 Job impact by state of implementing the Buffett Rule (S. 2059) and dedicating the revenue to infrastructure investments, 2013−2017 2013 2014 2015 2016* 2017* Total 42,756 87,420 91,543 97,008 102,291 Alabama 700 1,430 1,498 1,587 1,674 Alaska 113 231 242 256 270 Arizona 752 1,537 1,609 1,705 1,798 Arkansas 434 888 929 985 1,039 California 3,569 7,296 7,640 8,097 8,538 Colorado 725 1,482 1,552 1,645 1,734 Connecticut 377 771 808 856 903 Delaware 143 293 307 325 343 District of Columbia 274 560 586 621 655 Florida 2,218 4,536 4,749 5,033 5,307 Georgia 1,313 2,685 2,812 2,980 3,142 Hawaii 204 416 436 462 487 Idaho 219 449 470 498 525 Illinois 1,797 3,674 3,847 4,077 4,299 Indiana 1,067 2,182 2,284 2,421 2,553 Iowa 577 1,180 1,236 1,309 1,381 Kansas 483 987 1,034 1,096 1,155 Kentucky 682 1,395 1,461 1,548 1,632 Louisiana 714 1,460 1,529 1,620 1,708 Maine 221 451 473 501 528 Maryland 707 1,445 1,514 1,604 1,691 Massachusetts 926 1,894 1,984 2,102 2,217 Michigan 1,369 2,799 2,931 3,106 3,275 Minnesota 887 1,813 1,898 2,012 2,121 Mississippi 410 838 877 930 981 Missouri 972 1,987 2,081 2,205 2,325 Montana 162 331 347 368 388 Nebraska 359 733 768 814 858 Nevada 359 733 768 814 858 New Hampshire 201 411 430 456 481 New Jersey 932 1,906 1,996 2,115 2,230 New Mexico 298 609 638 676 713 New York 2,615 5,346 5,598 5,932 6,255 North Carolina 1,388 2,838 2,972 3,149 3,321 North Dakota 162 330 346 367 387 Ohio 1,876 3,836 4,017 4,257 4,488 Oklahoma 587 1,201 1,258 1,333 1,405 Oregon 575 1,176 1,232 1,305 1,376 Pennsylvania 1,990 4,069 4,261 4,515 4,761 Rhode Island 155 317 331 351 370 South Carolina 681 1,393 1,459 1,546 1,630 South Dakota 160 326 342 362 382 Tennessee 973 1,990 2,084 2,209 2,329 Texas 3,474 7,103 7,438 7,882 8,311 Utah 443 905 948 1,004 1,059 Vermont 106 217 228 241 254 Virginia 1,099 2,246 2,352 2,493 2,629 Washington 899 1,838 1,925 2,040 2,151 West Virginia 298 609 638 676 713 Wisconsin 1,009 2,064 2,161 2,290 2,415 Wyoming 103 211 221 234 247 * Assuming economy remains below full employment Source: Author's analysis of Citizens for Tax Justice 2008, Fieldhouse and Thiess 2012, and Bureau of Labor Statistics 2012 Share on Facebook Tweet this chart Embed Copy the code below to embed this chart on your website. Download image

Deficit-reduction effects

In addition to creating jobs, this investment policy would also reduce the deficit. The increase in economic growth and employment from the revenue-financed job creation measures would diminish the budget deficit as more workers pay taxes and less is spent on automatic stabilizers (e.g., unemployment compensation and food assistance). A dollar of infrastructure investment is currently estimated to generate $1.44 in economic activity, and every dollar in increased economic activity is associated with roughly a $0.37 improvement in the budget deficit while the economy remains depressed (Bivens and Edwards 2010). This means more than 50 percent of the cost of deficit-financed infrastructure investment is effectively self-financing in the near term. In other words, fully funded investment will thus produce excess revenues that can then be used to reduce the deficit, or reinvested to boost potential economic output over the long run and lay the foundation for a competitive economy.

Appendix: Methodology

Like A perfect match: Coupling tax fairness with job creation for a stronger economy, this analysis was calculated by applying a multiplier to the fiscal impact in each year. For the Buffett Rule we used a 0.39 multiplier. This multiplier was an estimate of the economic output response to changing the tax rates on capital gains and dividends, but it is appropriate to use here because the Buffett Rule is mainly an increase in the effective capital gains tax rate (the capital gains preferential rate accounts for why many high-income taxpayers pay such a low overall rate in the first place). For infrastructure investments, we used a 1.44 multiplier. Both of these multipliers are published by Mark Zandi at Moody’s Economy.com (Zandi 2011). These estimates assume that the economy has not returned to potential output by 2017, which is consistent with CBO projections (CBO 2012).

The state shares of the tax policy changes were calculated using state data on the distribution of taxpayers who make over $200,000, published by Citizens for Tax Justice (2008). The state shares of the infrastructure investments were calculated using each state’s share of national employment (Bureau of Labor Statistics 2012). We did not want to presume a certain state allocation of funds for three reasons: Different types of infrastructure would entail different allocations; certain allocations, such as the transportation allocations, are currently being debated and will likely change soon; and for some infrastructure areas, such as school construction, it is not clear which formula would be used.

Endnotes

Although this provision would apply to all taxpayers with income over $1 million, it would be phased in between $1 million and $2 million, so some taxpayers with income below $2 million would still pay slightly less than 30 percent.

While data on the distribution of taxpayers making more than $1 million are not available, we assume the distribution of taxpayers who make more than $200,000 is a reasonable substitution. In other words, if a state has a certain percentage of the nation’s taxpayers making more than $200,000, it is likely to have a very similar percentage of the nation’s taxpayers making more than $1 million.

References

Barthold, Thomas. 2012. “Revenue Estimate for S. 2059, Paying a Fair Share Act of 2012.” Letter from the Joint Committee on Taxation. March 26. http://www.washingtonpost.com/blogs/fact-checker/post/mitt-romneys-correct-stat-on-the-buffett-rule/2012/04/23/gIQAJ4NzcT_blog.html?hpid=z3

Bivens, Josh, and Kathryn Edwards. 2010. Cheaper Than You Think: Why Smart Efforts to Spur Jobs Cost Less Than Advertised. Economic Policy Institute, Policy Memo No. 165. http://www.epi.org/publication/pm165/

Bureau of Labor Statistics. 2012. State and Metro Area Employment, Hours, and Earnings. http://bls.gov/sae/

Citizens for Tax Justice. 2008. Who’s Rich? http://www.ctj.org/pdf/whosrich.pdf

Congressional Budget Office (CBO). 2012. The Budget and Economic Outlook: Fiscal Years 2012 to 2022. http://www.cbo.gov/publication/42905

Fieldhouse, Andrew. 2012. “Buffett Rule Needed to Restore Tax Fairness.” Economic Policy Institute, Economic Snapshot. April 11. http://www.epi.org/publication/buffett-rule-needed-restore-tax-fairness/

Fieldhouse, Andrew, and Rebecca Thiess. 2012. The Budget for All: A Technical Report on the Congressional Progressive Caucus Budget for Fiscal Year 2013. Economic Policy Institute Policy Center Working Paper. http://www.epi.org/publication/wp293-cpc-budget-for-all-2013/

National Economic Council. 2012. The Buffett Rule: A Basic Principle of Tax Fairness. http://www.whitehouse.gov/sites/default/files/Buffett_Rule_Report_Final.pdf

Pollack, Ethan. 2012. A Perfect Match: Coupling Tax Fairness with Job Creation for a Stronger Economy. Economic Policy Institute, Issue Brief No. 329. http://www.epi.org/publication/ib329-tax-fairness-job-creation/

Zandi, Mark. 2011. “At Last, the U.S. Begins a Serious Fiscal Debate.” Moody’s Analytics Dismal Scientist, April 14. http://www.economy.com/dismal/article_free.asp?cid=198972&src=msnbc