The impact of tax increases

Treasury Secretary Tim Geithner says the Obama administration favors letting tax cuts implemented under President George W. Bush expire, a move which will raise top marginal rates to nearly 40 percent:

"We believe that it is appropriate to let those tax cuts that go to the most fortunate 2 to 3 percent of Americans to expire on their current schedule."

Geithner's sentiment was echoed in stronger terms by noted economist House Speaker Nancy Pelosi:

"My stance is that the Bush-era tax cuts contributed to the deficit, did not create any jobs, and that they should be repealed."

Interestingly, a new paper co-authored by Christina Romer, who serves as the chair of President Obama's Council of Economic Advisers, indicates that tax increases have a very real and negative impact on the economy:

Our results indicate that tax changes have very large effects on output. Our baseline specification implies that an exogenous tax increase of one percent of GDP lowers real GDP by almost three percent. Our many robustness checks for the most part point to a slightly smaller decline, but one that is still typically over 2.5 percent.

In addition, we find that the output effects of tax changes are much more closely tied to the actual changes in taxes than to news about future changes, and that investment falls sharply in response to exogenous tax increases.

I suppose the refusal to extend the tax cuts is another part of the "recovery summer."

Related: The Wall Street Journal opines on the coming tax increases.