Biden’s Financial Policies Will Jeopardize Americans’ Prosperity And Leave Our Country’s Economy Gutted
By Brandon Arnold
The COVID-19 pandemic may be nearing an end, but its economic repercussions will be felt for decades, if not longer. Over the course of a little more than one year, the United States has spent more than $5.3 trillion to combat the disease and the economic devastation it has wreaked. That massive sum is more than the U.S. government’s entire budget in 2018. Or, in other words, more than the entire GDP of every nation in the world, except the U.S. and China.
Some of the spending was broadly supported – such as appropriating more than $800 billion for the Paycheck Protection Program to keep small businesses afloat or boosting unemployment benefits to ensure displaced workers could pay their bills at a time when many companies were forcibly shuttered. But much of the spending was wasteful or unrelated to the COVID emergency – like a private pension bailout to satiate the union lobby at a cost of approximately $100 billion, according to the Heritage Foundation, or $200 million that was spent on the Institute of Museum and Library Services.
The good news is the COVID spending spree appears to be coming to an end. Vaccines are rapidly being deployed and the economy is beginning to reopen, which is already spurring economic growth and job creation. Unfortunately, the dangerous levels of red ink in Washington, D.C. will persist.
Indebted For Decades
In March, prior to the passage of the $1.9 trillion American Rescue Plan Act, the Congressional Budget Office (“CBO”) projected that the United States will reach unprecedented levels of debt in just 10 years. When that happens, the debt-to-GDP ratio will hit 107%, exceeding the historical high set during World War II. It gets worse from there, with the national debt expected to be more than double the size of the economy from 2042 to 2051. This level of debt is unsustainable and the potential repercussions are immense…
As the CBO states, the projected levels of debt “would increase the risk of a fiscal crisis – that is, a situation in which investors lose confidence in the U.S. government’s ability to service and repay its debt, causing interest rates to increase abruptly, inflation to spiral upward, or other disruptions.”
Unfortunately, instead of austerity, the Biden administration is supporting a massive tax-and-spend package. This contains a toxic mix of economically damaging tax hikes and debt-financed new spending that will combine to exacerbate the debt problem and slow the recovery.
It should be clear to any objective observer that – following the COVID spending binge that spent trillions of dollars – the nation needs some degree of fiscal restraint. Unfortunately, instead of austerity, the Biden administration is supporting a massive tax-and-spend package. This contains a toxic mix of economically damaging tax hikes and debt-financed new spending that will combine to exacerbate the debt problem and slow the recovery.
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While some have cited former President Bill Clinton’s 1993 tax hike as an analogue, the comparison simply doesn’t hold water. Yes, the Clinton plan included big tax increases, but its primary purpose was to shrink the deficit and balance the budget, which is why it is often referred to as the Deficit Reduction Act of 1993. Instead of trillions in new spending – like Biden’s proposal – Clinton’s plan paired tax increases with hundreds of billions in spending cuts. This, combined with pro-growth policies achieved on a bipartisan basis in subsequent years, led to a strong economy and federal budget surpluses.
Biden’s plan contains neither pro-growth tax policies nor substantive spending reductions. To the contrary, the first part of his plan would spend an additional $2.25 trillion under the auspices of infrastructure. Only $115 billion of these funds – or about 5% – are allocated to repairing bridges, roads, and highways, which is what’s commonly regarded as traditional infrastructure. Some of the remaining amount would be dedicated to electric vehicles ($174 billion), R&D investment ($180 billion), universal broadband ($100 billion), and so-called “human infrastructure.”
To fund this ambitious spending package, Biden proposes $2 trillion in higher taxes, primarily on corporations. His plan would push the corporate tax rate to 28%, which would – when combined with the 4.4% average state and local corporate tax rate – give the United States the dubious distinction of having the highest corporate tax rate in the industrialized world. This would harm the competitiveness of U.S.-based companies and likely reduce the number of new firms created here.
An even larger problem with raising corporate tax rates stems from its incidence, or who will shoulder this higher tax burden. Of course, many proponents of higher corporate taxes believe the burden will be entirely paid by faceless corporations with bottomless bank accounts. However, virtually all economists – regardless of ideology – would dispute this notion.
Eat The Rich
The Left-leaning Tax Policy Center, a project of the Urban Institute and the Brookings Institution, suggests that workers bear 20% of the cost of corporate taxes, with the remaining 80% falling on capital or investment returns. By contrast, the Tax Foundation reviewed numerous studies over recent decades that “found labor bears between 50% and 100% of the burden of the corporate income tax, with 70% or higher the most likely outcome.”
Even worse, those workers who can least afford to be negatively impacted – those in the bottom quartile of income – would see a 1.45% reduction in after-tax income in the long run due to a 28% rate. That’s bad news for working-class Americans.
In short, this means that higher corporate tax rates correspond with a reduction in compensation for workers. Indeed, the Tax Foundation modeled President Biden’s proposal to boost the corporate rate from its current 21% to 28% and found it would eliminate 159,000 jobs and reduce wages by 0.7% for workers, on average. Even worse, those workers who can least afford to be negatively impacted – those in the bottom quartile of income – would see a 1.45% reduction in after-tax income in the long run due to a 28% rate. That’s bad news for working-class Americans.
In addition to a higher statutory rate, Biden’s infrastructure plan proposes imposing a corporate minimum tax, which is intended to ensure that no corporation can evade taxes by exploiting loopholes in the tax code. While the intention may have merit, the impact of such a tax on “book income” would be problematic because this measure of income does not account for legitimate expenses such as capital investments. Under a minimum tax scenario, a corporation would effectively be penalized with higher taxes for making investments in machinery and equipment that can enhance productivity and competitiveness. As Nicole Kaeding, formerly of National Taxpayers Union Foundation, explained:
Taxable income and book income vary for good reason. Taxable income allows companies to deduct their capital investments and carry forward their previous losses to better align their taxable profits with their economic profits. Taxable income isn’t perfect – expensing, for example, should be made permanent and expanded to all assets – but it serves as a better tax base than book income.
Unfortunately, Biden’s proposal to raise taxes on corporations by $2 trillion is only the tip of the iceberg… Democrats on Capitol Hill are emboldened by their majority status in both the Senate and House of Representatives and are aggressively looking to enact tax policies that would, in their estimation, reduce income inequality – though the economic merits of these ideas may be lacking.
In particular, the progressive wing of the Democratic Party – led by liberal stalwarts like Senator Bernie Sanders (I-VT) and Senator Elizabeth Warren (D-MA) – have amplified their attacks on corporations and the wealthiest Americans. For instance, Senator Warren’s “Ultra-Millionaire Tax” has garnered significant attention in the media and on Capitol Hill. Her legislation would apply a tax on the net wealth of anyone with $50 million in assets. Her tax starts at two cents per dollar of wealth, but can escalate to 6% if certain conditions are met. She often pitches this as a minimal sacrifice that the extremely wealthy can easily afford for the betterment of other Americans. Her rallying cry of “just two cents” may have struck a nerve with the populist Left, but her proposal leaves much to be desired.
First of all, it’s extremely difficult to tax wealth, as doing so requires assessing the value of all of an individual’s assets. That includes real estate, privately owned businesses, stocks, cars, antiques, coin collections, artwork, wine collections, and much more. The precise value of these assets is not only extremely hard to ascertain, but it’s also extremely volatile.
This lends itself to a host of tax avoidance strategies that wealthy people can employ. As Andy Puzder, former CEO of CKE Restaurants, noted in a Wall Street Journal op-ed: “The tax would also give wealthy Americans an incentive to own illiquid assets with values that are easier to understate, rather than publicly traded stocks and bonds that have an observable value the Internal Revenue Service can feast on.”
It wasn’t a change in sentiment toward billionaires that caused a reversal in these policies. Rather, it was real-world experience in implementing a wealth tax.
Indeed, this is exactly what happened in Europe. As recently as 1990, 12 European countries had a wealth tax… Today, only three still do. Other large countries like India have also experimented with a wealth tax before abandoning the concept. It wasn’t a change in sentiment toward billionaires that caused a reversal in these policies. Rather, it was real-world experience in implementing a wealth tax.
Senator Warren at least partially acknowledges this problem in her own legislation. She allocates $100 billion over 10 years as a boost for the Internal Revenue Service to administer the tax. This would represent a near doubling of the agency’s budget, which is projected to be $12 billion in fiscal year 2021. But even with an unlimited budget, real-world experiences in other countries suggest that it’s unlikely the IRS could be successful in administering a wealth tax.
France imposed a wealth tax, but it was riddled with exemptions that allowed wealthy individuals to shield certain assets from taxation. These exemptions included rugs, antiques that were more than 100 years old, stamp collections, zoological specimens, and items having numismatic value. And because it’s France, wine and brandy were also excluded.
The result was a tax that collected a fraction of its estimated revenues. French bean counters expected it to bring in 5 billion francs, but it delivered only 2.8 billion in its first year. Even after repealing the wealth tax in 1986 and reinstating it in 1988, it remained an administrative nightmare for French tax collectors. According to a 2008 study, the tax reduced GDP by roughly the same amount as the revenue it produced. Furthermore, it led to an exodus of high-wealth individuals. Former Prime Minister Édouard Philippe estimated that due to the wealth tax, 10,000 people left the country over a 15-year period – taking with them 35 billion euros in net worth.
The dubious tax was repealed in 2017 as France joined the majority of European countries that had experimented with a wealth tax before ultimately repealing it.
Outside of Europe, other countries found similar administrative problems. India repealed its wealth tax in 2015… once again, not because of any affinity for the wealthy. As Indian Financial Minister Arun Jaitley noted when the tax was repealed, “Should a tax which leads to high cost of collection and a low yield be continued or should it be replaced with a low cost and higher yield tax?”
Real-world experience demonstrates that wealth taxes simply do not work. Yet, this remains a high priority of the progressive Left in America. This is a clear indication that populism is a driving force in the current political arena.
Real-world experience demonstrates that wealth taxes simply do not work. Yet, this remains a high priority of the progressive Left in America. This is a clear indication that populism is a driving force in the current political arena. Indeed this same mentality has hatched other ideas intended to punish job-creators. These punitive tax measures include higher personal income tax rates, higher taxes on investment earnings, a new tax on financial transactions, an expanded estate tax, and much more.
The Great Financial Imbalance
One might sympathize with these policies if the goal was to bring the national debt under control with a combination of revenue raisers and spending cuts, as Clinton did in 1993. But that is not the case here… Biden’s massive tax hikes are combined with spending increases that would, on net, increase deficits by hundreds of billions of dollars. Warren’s wealth tax is intended to partially offset the cost of her government-run health care proposal – Medicare for All. By her own math, the wealth tax would generate $1 trillion in new revenue, which pales in comparison to the cost of her health care plan, which could reach $34 trillion.
The federal budget is in complete disarray. Absent corrective measures, it will be out of balance for decades to come and future generations of taxpayers will be saddled with untenable levels of debt. President Biden and his progressive allies on Capitol Hill believe more taxes are the remedy. In truth, their proposals represent a toxic combination of bad policies – higher taxes that would slow the economic recovery and more debt that would exacerbate our fiscal imbalance. Instead of looking for more ways to raise taxes and expand the government, their time would be better spent reining in excessive spending and allow American job creators and innovators to help bring the nation out of the ongoing economic crisis.
Brandon Arnold is the executive vice president of the National Taxpayers Union. He has testified on fiscal policy before Congress and has also appeared on several television and radio networks including C-SPAN, Fox News, Fox Business, and more. Brandon’s writings have been published in Politico, The Hill, the Seattle Times, the Pittsburgh Tribune-Review, and more.