Tags: 2020 Elections | Joe Biden | biden | smother | economy | raising | taxes

Biden Would Smother the Economy by Raising Taxes

Biden Would Smother the Economy by Raising Taxes

(Joe Sohm | Dreamstime.com)

By    |   Saturday, 17 October 2020 09:27 PM

A high priority for a Biden White House would be to raise taxes on high-income Americans, and to push the corporate rate up to 28% from 21%. This would satisfy many progressives who want to see higher taxes at the top, but it would be a wrong-headed policy for a new administration, creating a headwind in a weak economy. And increasing the corporate rate would reduce U.S. competitiveness, productivity and wages over the longer term. 

Biden pledges not to increase individual taxes on “anyone making less than $400,000.” The top individual income rate would go back up to 39.6%, from 37%, among other provisions. All told, the Biden plan would generate around $4 trillion in revenue over the next decade, a considerable amount.

But the economy will be in bad shape throughout 2021, with unemployment still high and output considerably below its pre-pandemic level. Colder weather in winter will limit outdoor dining, and a resurgence of the virus in Europe will likely dampen U.S. exports. With Covid-19  still spreading, people will continue to curb their activity — and a strong resurgence of the virus would threaten to move the recovery backward. Even the most optimistic analysts expect that much of the year will pass without a vaccine in wide distribution. 

In this macroeconomic environment in 2021, the White House should be leading an all-hands-on-deck effort to get the economy back on track by supporting households, businesses, and state and local governments before the arrival of a vaccine. If elected, a Biden White House would only have so much political capital. Tax increases would slow growth or leave it relatively unchanged. Why use any capital on policies that won’t speed up the recovery? 

Of course, the Biden plan as a whole would increase spending as well as taxes. Conventional economic scoring suggests that a Democratic sweep in November would lead to stronger economic performance than if Trump were re-elected and Republicans kept the Senate. Moody’s Analytics, for example, forecasts GDP to grow 4.2% in 2021 and 7.7% in 2022 if Biden wins and Democrats take the Senate. Moody’s forecasts 2.3% and 4.5% growth in 2021 and 2022, respectively, under the political status quo. 

What’s driving the difference? It isn’t Biden’s proposed tax increases. Instead, Moody’s assumes that Biden would enact his full economic agenda — an additional $7.3 trillion spent on infrastructure, education, the safety net, Social Security, housing and health care, by their tally. Because all this spending is largely deficit financed, it juices growth in conventional economic models, overwhelming any drag from the proposed tax increases. Moody’s estimates Biden’s plan would increase the deficit by $2.6 trillion during his first term, after taking both proposed spending and tax increases into account. 

Even after the economy is back to full health, a President Biden shouldn’t raise the corporate tax rate. If he did, companies would respond by investing less in factories and equipment in the U.S. Less investment means workers are less productive, which reduces their value to companies, lowering their wages. 

In the debate over the 2017 corporate rate reduction, supporters and opponents alike got this story wrong. Supporters of the cut raised expectations that workers’ wages would immediately increase. Yet it takes time for lower taxes to improve investment, productivity and wages. Opponents pointed to the fact that many companies returned funds to shareholders following the tax cuts, rather than using the savings to boost investment. But the use of the immediate tax savings was beside the point. What mattered was how the new tax incentives affected future behavior. 

In today’s political climate, the argument that higher corporate taxes would reduce wages may sound like a right-wing talking point. Instead, it is the standard view among economists. The nonpartisan Congressional Budget Office argues that workers bear 25% of the burden of the corporate income tax. The Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution, concludes wages and labor income bear 20% of the burden of the corporate tax.

None of this is to say that the U.S. doesn’t need additional tax revenue. Even without the additional spending on Biden’s agenda, the U.S. government needs a higher tax burden in order to put the national debt on a downward trajectory. The CBO projects that next year, for the first time since World War II, the national debt will be larger than annual economic output. In 2023, the budget office forecasts that the debt will be larger than at any point in U.S. history. 

The growing cost of Social Security and federal health programs, including Medicare, are driving these projections. While spending cuts should make up the lion’s share of efforts to address the national debt, relying only on reductions in Social Security and Medicare is neither politically feasible nor desirable. Tax revenue will have to increase, as well. 

The massive borrowing that has taken place to finance economic recovery programs in the pandemic was wholly justified. But in a healthy economy, additional spending should be paid for. Biden is right to pair his proposed spending increases with more tax revenue.

Some of Biden’s proposed tax increases would be a sensible way to raise revenue — if enacted after the economy recovers. For example, he would eliminate tax preferences for certain favored industries, including real estate and energy companies. But if a Biden administration wants to address the structural budget deficit or pay for new spending programs, it should look to new sources of tax revenue other than income. 

Econ 101: If you tax something, you get less of it. So let’s tax something we want less of, like pollution. Income taxes mean less income, which means less work, saving and investment. So let’s tax consumption rather than income. 

In a weak economy with a once-in-a-century pathogen slowing economic activity, we don’t want less income, so Biden’s plan to raise income taxes is misguided. And even in a strong economy, the U.S. should not increase corporate taxes.  

Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute. He is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).”

© Copyright 2020 Bloomberg L.P. All Rights Reserved.

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Promising to make corporations and the well-off pay more may be smart politics but it’s shortsighted policy.
biden, smother, economy, raising, taxes
Saturday, 17 October 2020 09:27 PM
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