Budgets are about priorities. In President Joe Biden’s administration’s new budget, its apparent priorities are marred by problems. Here’s the cheat sheet version: Rather than contain explosive spending growth, it would use a bunch of new taxes to wage class warfare.
Although this budget died when it arrived in Congress, it is worth examining some of the reasons why this is so. The president aspires to spend about $6.9 trillion next year, a 55% increase from pre-pandemic levels and $10 trillion by 2033. While Biden hopes to raise $4.7 trillion over 10 years in taxes, the debt would nevertheless increase over the next decade by 19,000 billion dollars while the debt/GDP ratio falls from 98% to 110%. All that debt in a high interest rate environment would have left Uncle Sam shelling out more than $10.2 trillion in interest payments during that time.
In addition to this fiscal calamity, Social Security benefits could be automatically reduced by about 20% over the next decade if the program is not reformed. Biden is proposing to reform Medicare, but his means are class warfare taxes, price controls and transfers from the general fund. There is no improvement in the program’s own finances. So Biden’s seemingly aggressive plan fails to address one of the biggest fiscal challenges we face as a country going forward.
Instead, the budget suggests all sorts of ways to raise tax revenue, many of which would even fail to do so.
In our system, regardless of the level of tax rates, the federal government has never managed to capture more than 19% of GDP for a long time. This constraint means that if Washington decides to spend more than 25% of GDP, American taxpayers are committed to large deficits to cover the difference.
Yet someone in the Biden administration thinks such facts don’t apply today. For example, the budget increases corporate taxes from 21% to 28%. Economists have shown that most of the burden will fall on workers in the form of lower wages.
Additionally, Biden would roughly double the official capital gains tax rate for investments to 39.6%. But according to Americans for Tax Reform, “The United States currently has a combined capital gains rate of over 29%, including the Obamacare tax of 3.8% and the average capital gains rate of 5.4% Under Biden, that rate would approach 50 percent.” What does the administration think this will do to invest in the green energy innovations it wants to unleash?
More worryingly, the administration wants to impose a minimum annual tax rate of 25% on unrealized capital gains for individuals with incomes and assets exceeding $100 million. These gains are not income; they are assets that have gone up in value on paper, something that could disappear overnight. More importantly for everyone else, this wealth tax would reduce the amount of capital invested in productive and job-creating projects, meaning that economic growth, innovation and wages would all decline.
Next, the budget would raise Medicare taxes by 32% for people earning more than $400,000 a year. The tax would apply to business and investment income, wages and self-employment income. As a result, it will hurt many small businesses, running counter to Biden’s pledge to spare them from his efforts to expand Leviathan.
There are even more tax increases in this budget, but you get the idea. Higher taxes on small businesses and entrepreneurs, along with lower capital funding, would slow growth and therefore put downward pressure on tax revenues.
It’s not just a quirk in the US tax system that needs fixing. Wealth taxes have been tried on a large scale in Europe and have generated such intense incentives to escape more favorable tax environments that they have rarely generated much revenue. They do, however, have significant administrative and economic costs, costs that would only further dampen US economic growth.
Economic studies have shown the negative impact that large increases in public spending and the debt burden have on economic growth. Clearly, further hampering our already below-average growth rates would seriously harm people’s ability to move up the economic ladder. But the most unfortunate impact, even in a relatively wealthy country, is that a slow economy can bring out the worst in us. Indeed, less opportunity means more tribalism and division. This can threaten peace, democracy and the liberal values we take for granted.
In that sense, this budget is not just a commitment to less growth because of its taxes and spending, but a missed opportunity to give a divided and hostile America a little more economic hope.
COPYRIGHT 2023 CREATORS.COM.
