President Biden has released his latest fiscal proposal, the “American Families Plan,” which proposes $1.8 trillion in new spending over 10 years, funded by tax increases. My FREOPP colleagues will be posting on some of the spending provisions throughout the week, but in this post I wanted to highlight a Twitter thread I've posted on the tax provisions of both this proposal and the previous one, the “American Jobs Plan.”
The two core components of Biden’s $4 trillion in tax increases are a doubling of the federal capital gains tax rate from 23.8% to 43.4%, and an increase in the corporate income tax rate from 21% to 28%.
Both of these taxes would harm lower- and middle-income workers, first and foremost by badly damaging economic growth (that is to say, job growth and wage growth).
The capital gains tax hike would actually reduce tax revenue, because investors would change their behavior to avoid the tax. For example, investors would likely choose not to realize existing investment gains, e.g. not selling stocks whose prices have gone up, and also avoid future investments in dynamic industries whose rewards would now be lower than their risks.
Investors would also reduce funding for startups—which provide 40% of net new jobs—because they would be more hesitant to sell existing investment holdings (and pay taxes on the gains) to invest in new companies.
Biden’s proposed corporate tax hike—from 21% to 28%—would vault the U.S. back near the top of the industrialized world, eclipsing all European countries other than Portugal, France, and Germany. But because Biden’s proposal would also assess a global minimum tax on U.S. companies with revenues abroad, those companies would have a powerful incentive to sell themselves to foreign acquirers or to relocate outside the U.S., reducing U.S. employment.
In addition, a corporate tax hike on this scale would substantially reduce—and in some cases eliminate—the ability of companies to hire more workers, pay their existing workers more, or buy goods and services from other U.S. businesses. The costs to job and wage growth would be significant. The Tax Foundation estimates that raising the corporate tax rate to 28% would reduce U.S. employment by 138,000, and reduce wages by 0.6%.
In revenue terms, Biden proposes tax hikes that are three times as large as the tax cuts in the Tax Cuts and Jobs Act of 2017. Once the coronavirus recovery is completed, and the Federal Reserve has turned off its monetary stimulus, the effect of these tax increases will almost certainly be to reduce job and wage growth for those who most need it.