$4 trillion drained from the private sector (not including the proposed carbon tax)
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by Raymond J. Keating-
Tax increases are never a good idea for the economy. But they are particularly burdensome during tough economic times, as economists from across schools of economic thought would agree.
Nonetheless, too often, politicians decide to ignore economic reality, and inflict tax increases when they are most ill-advised. Consider that was the case with Congress and the president during, for example, the administrations of Herbert Hoover, Franklin Roosevelt and Barack Obama.
And today, given the potential economic ills due to the corona virus, we have presidential candidates advocating major tax increases. That includes former Vice President Joe Biden.
Whenever the country emerges from the coronavirus, and its human and economic woes, the policy environment needs to be pointed in a pro-growth direction to help the economy bounce back strongly. Unfortunately, the Biden tax plan would achieve the exact opposite.
Most obvious, the Biden tax increases would drain resources away from vital private-sector undertakings – including starting up and investing in businesses, hiring workers and consumption – and hand those dollars over to the government for politically-driven spending. That’s a recipe for further diminishing economic growth.
In particular, Biden and his campaign assume that increases in taxes on upper-income earners will impose no costs on the economy and others. That, of course, is political wishful thinking. For example, upper-income earners tend to be entrepreneurs and investors who start up, build and invest in businesses, which of course are essential activities to drive innovation, and business, economic, productivity, income and job growth.
Consider key tax increases called for by Biden:
● Higher Personal Income Tax Rates. While current personal income tax rates are too high, Biden would increase tax rates on earners making more than $400,000, with the top rate increasing from 37 percent to 39.6 percent. This class-warfare tax increase has proven to be a favorite among Democratic Party presidential candidates in 2020. But Biden ignores that higher taxes on upper-income earners create problems up and down the income ladder. Again, this tax increase would mean higher taxes on entrepreneurs and investors, and therefore, fewer resources and reduced incentives for investing in new and growing businesses.
● Higher Taxes for Small Businesses. Biden would phase out the qualified business deduction for earnings over $400,000. This 20 percent deduction for many pass-through businesses was part of the 2017 tax relief measure, and it effectively reduces the top tax rate on non-C-corp small businesses – such as LLCs and S-Corps – from 37 percent to 29.6 percent. Again, this rate remains too high and is somewhat limited in terms of what businesses it applies to; yet, Biden is looking to increase income tax rates on small firms. Rolling back this deduction would result in a major tax increase on small businesses, which means reduced returns on entrepreneurship, and fewer resources available for business growth.
● Higher Capital Gains and Dividend Taxes. While the best capital gains tax rate from an economic growth perspective is 0 percent, Biden would dramatically increase the capital gains and dividends tax rate for earnings over $1 million, basically doubling the top rate from 20 percent to 39.6 percent. When including the 3.8 percent ObamaCare tax, the rate would increase from 23.8 percent to 43.4 percent. Biden also would tax unrealized capital gains at death.
The capital gains tax ranks among the most destructive levies imposed by government as it directly reduces potential returns of such high-risk, and economically critical, endeavors like starting up and investing in new and expanding businesses. One clear way of stifling economic growth is to raise taxes on capital gains.
● Higher Payroll Taxes. Biden would increase Social Security payroll taxes (12.4 percent) by applying the tax to earnings over $400,000. Again, raising the costs of work, and government taking dollars from those who earned them stand as obvious economic negatives.
● Higher Corporate Income Taxes. Biden would increase the corporate income tax rate by 33 percent, from 21 percent to 28 percent, while also doubling the minimum tax on profits – from 10.5 percent to 21 percent – for foreign subsidiaries of U.S. businesses. The clearest pro-growth aspect of the late-2017 tax relief package was reducing the corporate income tax rate. Unfortunately, Biden would move in the opposite direction by raising the corporate income tax, and thereby reducing the ability and incentives for corporations to invest and expand. For good measure, it must be recalled that most C corporations rank as small businesses, with 84.8 percent having fewer than 20 employees.
● Carbon Tax. According to the Washington Post, Biden supports a “price on carbon,” that is, a carbon tax. As his campaign website puts it: “Establish an enforcement mechanism to achieve net-zero emissions no later than 2050, including a target no later than the end of President Biden’s first term in 2025 to ensure we get to the finish line. This enforcement mechanism will be based on the principles that polluters must bear the full cost of the carbon pollution they are emitting and that our economy must achieve ambitious reductions in emissions economy-wide instead of having just a few sectors carry the burden of change.” This is a broad-based energy tax that will hit U.S. consumers and small businesses, and will make U.S. entrepreneurs, businesses and workers far less competitive in the global marketplace.
An analysis of the Biden tax plan by the Tax Policy Center for the Urban Institute and Brookings Institution estimates that the former vice president’s tax increases would drain a breathtaking $4 trillion from the private sector over the coming decade. But that estimate does not include Biden’s carbon tax.
In the end, the Biden tax plan would inflict real harm on our economy by diminishing resources available and incentives for the engines of economic growth, that is, working, investing and entrepreneurship. This agenda would be a major negative in a good economy, with those negatives getting further magnified during troubled economic times.
Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.