If the highest income tax rate increases from its current 35% to 44% (including Medicare and Obamacare tax increases) on the wealthiest taxpayers, a high income family making $500,000 will have $45,000 less to spend. That family may decide to cut out a gardener, housekeeper, vacation, or even a new yacht. A progressive might say "so what, they are rich, and they will still have an opulent life style." Unfortunately, that does not help the newly unemployed housekeeper or gardener find a job.
If the high income family made its money from a small business, such as a restaurant, they may decide not to cut out personal spending but to reduce investment in their restaurant. Perhaps they decide not to buy the new $45,000 replacement dining tables. That hurts the table manufacturer who does not need as many workers making the tables. So, he lays off an excess employee. Perhaps the restaurant will decide to buy the replacement tables and instead lays off a waiter earning $45,000. Service will be slower, but the owner's family can pitch in to take up the slack. (Although, they may not need to if business slows down due to the multiplier effect discussed below.)
Unfortunately, the unemployed housekeeper or waiter will have to make much larger cuts to his or her budget. Not only are they eliminating the minor luxuries of life, like eating out, but they may have to eliminate essential services; e.g. sell their car, or move out of their apartment and move in with extended family. As a result, people providing these essential services have less money. They in turn make similar cuts to their staff which results in additional unemployment. Economists refer to these secondary layoffs caused by lack of spending by the employees initially laid off as the multiplier effect.
If each taxpayer making over $500,000 directly or indirectly reacted to the tax increase by laying off one employee, a million high income taxpayers would react similarly by laying off one million people! Lower income families hit by the tax increase would react similarly. With the multiplier effect, perhaps another million people would be laid off.
The impact of the $120 billion reduction in federal spending will have a similar impact. If only half the spending reduction is achieved by reducing employment of $50,000/yr employees,over a million people will be laid off. These layoffs will also have a multiplier effect leading to additional layoffs and higher unemployment.
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