President Joe Biden is reportedly considering a plan to hike taxes on individuals and corporations in order to help offset another splurge of government spending. Preliminary analyses of the possible tax hikes show they would transfer as much as $2 trillion from the private sector to the government, likely costing jobs and reducing wages for American workers.
Of course, that’s what taxes do. Every dollar the federal government drains from the economy is a dollar that cannot be used to grow a business, cannot be used to purchase new equipment, and cannot be paid to workers or shareholders.
Biden is considering hikes to both the personal income tax and corporate income tax, Bloomberg reports, citing unnamed White House sources. Advisers are reportedly kicking around ideas like raising the corporate income tax rate to 28 percent (from 21 percent); hiking personal income taxes on individuals and households that earn over $400,000 annually; and imposing a higher capital gains tax for individuals who make over $1 million annually. The higher taxes would be paired with an expected White Houe announcement of what’s likely to be a multi-trillion-dollar infrastructure spending package.
We’ll have to wait to see the specifics of the proposal, but much of what is under consideration seems roughly in line with the tax policies the Biden campaign published last year. If enacted, those policies would raise federal revenue by about $2.1 trillion over 10 years, according to an analysis by the Tax Policy Center, a nonpartisan think tank. The organization says Biden’s plans would reduce America’s GDP by between 0.3 percent and 0.7 percent annually for the rest of the decade.
The corporate tax hike alone would reduce long-term economic growth by about 0.8 percent, kill 159,000 jobs, and reduce wages, according to a separate analysis by the Tax Foundation, a nonpartisan think tank. Raising the federal corporate tax rate to 28 percent would make the average state-federal tax burden for American businesses 32.34 percent—the highest rate in the developed world.
“Workers across the income scale would bear much of the tax increase,” write the Tax Foundation’s Garrett Watson and William McBride. “For example, the bottom 20 percent of earners would on average see a 1.45 percent drop in after-tax income in the long run.”
Politically, moving the corporate income tax rate to 28 percent would be a symbolic win for Democrats. That’s what the federal government charged American businesses before Republicans pushed through a package of tax cuts in 2017 aimed at increasing U.S. competitiveness with other large economies. Undoing those tax cuts for corporations and high-earning individuals has become a top priority for congressional Democrats.
“Biden will require corporations and the wealthiest Americans to pay their fair share,” Treasury Secretary Janet Yellen told senators during her confirmation hearing in January. She said the Biden administration would seek multilateral agreements to set a global minimum corporate tax as part of a strategy to prevent American companies from shifting profits overseas to avoid higher taxes here.
On one hand, any clear-eyed assessment of America’s fiscal status must leave room for tax increases as part of an overall strategy to balance the budget. The national debt now exceeds $28 trillion, and the annual budget deficit was already on pace to exceed $2 trillion even before last week’s passage of a $1.9 trillion spending bill that will be entirely paid for with borrowing. Both the debt and deficit are expected to grow in the coming years.
But Biden’s plan, according to Bloomberg, seems to be aimed at using this tax increase to offset even more spending. That’s an approach that Congress should carefully scrutinize with both eyes fixed on the growing, unsustainable national debt.
Policy makers should also keep in mind that many businesses are still feeling the effects of President Donald Trump’s tariffs, which continue to function as a sort of stealth tax hike for many businesses. That’s especially true for the manufacturing sector, which had slipped into recession in 2019—before the pandemic hit—in large part due to the increased costs and uncertainty raised by the U.S.-China trade war.
Biden has been unwilling to remove those tariffs, even though doing so would help stimulate an economic recovery. In fact, the administration appears to be aiming to make things even harder for American businesses as they emerge from the pandemic.
Trump made it more expensive to purchase the wares and equipment that American businesses need to buy to earn a profit. Now, Biden may be planning to take a larger share of whatever profit they can scratch out.
Photo Credit: Gage Skidmore from Peoria, AZ, United States of America, CC BY-SA 2.0 https://creativecommons.org/licenses/by-sa/2.0, via Wikimedia Commons