Here are 8 things you should know about the budget proposal President Joe Biden released today:
- It would raise several taxes to rates higher than that of China.
- It would unleash tens of thousands of new IRS agents on the American people.
- It would give the IRS the power to snoop on Americans’ Venmo, CashApp, and bank accounts.
- It will impose a Second Death Tax, which will harm the U.S. economy and family-owned businesses.
- It would let the Tax Cuts and Jobs Act expire, causing taxes to go up on middle-class families.
- It would impose a harmful, retroactive tax increase on capital gains and dividends.
- It will impose a higher corporate tax, hurting jobs and price of goods.
- It acts as an admission by the Biden administration that its policies would do little to grow the economy.
For more details, read below.
1. It would raise several taxes to rates higher than that of China.
President Biden has proposed doubling the capital gains tax rate and increasing the corporate income tax to 28 percent as part of his $4 trillion spending plan. Both proposals are uncompetitive with China, encouraging companies to move U.S. jobs and capital overseas.
The U.S. currently has a combined capital gains rate of over 29 percent inclusive of the 3.8 percent Obamacare tax and the 5.4 percent state average capital gains rate. Under Biden, this rate would approach 50 percent. This would give the U.S. a capital gains tax that is significantly higher than foreign competitors:
China’s Capital Gains Rate: 20%
United States Now: 29.2% (20% + 3.8% Obamacare tax + 5.4% state average)
United States Under Joe Biden: 48.8% (39.6% + 3.8% Obamacare tax + 5.4% state average)
Not only will Biden’s capital gains tax hike make us uncompetitive, it will also harm the economy, threaten the life savings of Americans, and could even reduce short term revenues.
Next, President Biden has proposed increasing the corporate income tax rate to 28 percent. Senator Joe Manchin (D-W.Va.) has come out against this rate, saying he would support a 25 percent rate instead. Ultimately, both rates are uncompetitive with China.
The U.S. federal corporate tax rate is 21 percent. However, states also levy their own corporate tax rates, averaging an additional 6 percent. Because this state tax is deductible when paying the federal corporate rate, the combined national and subnational rate averages out to 25.77 percent.
A 28 percent federal rate would therefore result in a combined federal and state rate of 32 percent, higher than Communist China.
China’s rate: 25%
U.S. national + subnational rate IF Democrats raise federal rate to 25 percent: 29.5%
U.S. national + subnational rate IF Democrats raise federal rate to 28 percent: 32%
2. It would unleash tens of thousands of new IRS agents on the American people.
Legions of new IRS agents will be unleashed for invasive and time-consuming audits of middle-class Americans and small businesses.
President Joe Biden wants to hire 86,852 new IRS agents, which would more than double the agency’s workforce.
To put this into perspective:
- With 86,852 IRS agents, you could fill Nationals Park twice.
- 86,852 IRS agents is more than the population of Biden’s hometown of Wilmington, Delaware which has a population of 70,644.
Even Obama-era IRS chief John Koskinen – a longtime advocate of increasing the IRS budget – thinks President Joe Biden’s proposal to increase IRS funding by $80 billion is too much.
As reported by the New York Times:
“I’m not sure you’d be able to efficiently use that much money,” Mr. Koskinen said in an interview. “That’s a lot of money.”
Rather than fix the agency’s longstanding mismanagement, ineptitude and abuse problems, Biden’s approach will make the problem worse.
3. It would give the IRS the power to snoop on Americans’ Venmo, CashApp, and bank accounts.
As part of this proposal, banks and third-party payment providers, like Venmo and CashApp would be required to report account holders’ aggregate account outflows and inflows.
“The proposal would require banks to report annual account inflows and outflows to the Internal Revenue Service. The requirement would also extend to peer-to-peer payment services such as Venmo,” notes the Wall Street Journal.
President Biden claims that this proposal is designed to “crack down on millionaires and billionaires who cheat on their taxes.” However, it is unclear how monitoring Venmo accounts – many of which are held by younger Americans – contributes to this goal.
The average Venmo transfer amount is $60 and is popular among young people, with over 7 million Venmo users belong in the 18-34 age group. For users who have undergone identity verification, the weekly spending limit is $7,000. These trends exist for most third-party payment providers.
It is hard to see how millionaires and billionaires are using Venmo or CashApp to launder mass amounts of money. This is just another effort to expand the power of the IRS. Rest assured, the IRS will use these powers against Americans of all income levels.
4. It will impose a Second Death Tax, which will harm the U.S. economy and family-owned businesses.
President Joe Biden is proposing to create a second Death Tax by repealing step-up in basis. This will impose the capital gains tax (which Biden has proposed raising to 43.4 percent) on the unrealized gains of every asset owned by a taxpayer when they die and will be imposed in addition to the existing 40 percent Death Tax.
Repeal of step-up in basis will create new complexity for many taxpayers including family-owned businesses. It will force predominantly family-owned businesses to downsize and liquidate assets, leading to fewer jobs, lower wages, and reduced GDP. As noted by the Ernst and Young study, repeal of step-up basis will increase the cost of capital and discourage new investment. This negative economic impact will cost 80,000 jobs each year for the first ten years, increasing to 100,000 jobs each year thereafter. One third of the tax will also fall on American workers in the form of lower wages.
Repealing step-up in basis has already been tried and failed. In 1976 congress eliminated stepped-up basis but it was so complicated and unworkable it was repealed in 1980 before it took effect.
As noted in a July 3, 1979 New York Times article, it was “impossibly unworkable”:
“Almost immediately, however, the new law touched off a flood of complaints as unfair and impossibly unworkable. So many, in fact, that last year Congress retroactively delayed the law’s effective date until 1980 while it struggled again with the issue.”
As noted by the NYT, intense voter blowback ensued:
“Not only were there protests from people who expected the tax to fall on them — family businesses and farms, in particular — bankers and estate lawyers also complained that the rule was a nightmare of paperwork.”
5. It would let the Tax Cuts and Jobs Act expire, causing taxes to go up on middle-class families.
According to IRS statistics of income data analyzed by Americans for Tax Reform, households earning between $50,000 and $100,000 saw their average tax liability drop by over 13 percent between 2017 and 2018. By comparison, households with income over $1 million saw a far smaller tax cut averaging just 5.8 percent.
Even left-leaning media outlets have (eventually) acknowledged the tax cuts benefited middle class families. The Washington Post fact-checker gave Biden’s claim that the middle class did not see a tax cut its rating of four Pinocchios. The New York Times characterized the false perception that the middle class saw no benefit from the tax cuts as a “sustained and misleading effort by liberal opponents.”
If repealed, these families would find themselves paying more in taxes.
6. It would impose a harmful, retroactive tax increase on capital gains and dividends.
President Biden has proposed doubling the capital gains tax rate. Under Biden, the top capital gains rate will be 48.8 percent after state taxes. Even worse, the budget assumes that the capital gains tax hike took effect in late April, making it a retroactive tax.
The retroactive nature of this tax would cause anxiety and uncertainty, ultimately leadings to severe economic damage. People make financial plans based on existing or expected policy. As Senator John Thune (R., S.D.) said, “… you can’t change the rules in the middle of the game.”
Further, capital gains taxes themselves act as a barrier to job creation, wage growth, and economic growth.
This tax imposes double taxation on corporate income – first, businesses pay the corporate income tax on their earnings. Second, the investor pays the capital gains tax on dividends received or stocks when they are sold. This double taxation discourages savings, suppresses productivity, and discourages investment. Ultimately, this tax hike will threaten business creation, business expansion, entrepreneurship, and jobs and wages.
Biden’s capital gains tax hike could also reduce retirement savings. As part of his tax hike, Biden would double the tax rate on carried interest capital gains. This will harm private equity investors including the 165 public pension funds representing 20 million public sector workers.
Biden’s tax hikes could even reduce federal revenues in the short term. Because the tax only applies when a taxpayer sells the asset, a high capital gains rate discourages individuals from selling in order to delay having to pay the tax. Historically, when the capital gains tax was cut, revenue increased. When the capital gains tax is low, investment increases, stock prices increase, and revenue goes up. The inverse is of course true.
7. It will impose a higher corporate tax, hurting jobs and price of goods.
Workers, consumers, and shareholders will bear the burden of an increased corporate tax rate. Such a hike will cause businesses to invest less in the United States and more overseas, resulting in fewer job opportunities and lower wages for American workers:
- A Treasury Department study estimated that “a country with a 1 percentage point lower tax rate than its competitors attracts 3 percent more capital.” This is because raising the corporate rate makes the United States a less attractive place to invest profits.
- According to the Stephen Entin of the Tax Foundation, labor (or workers) bear an estimated 70 percent of the corporate income tax in the form of wages and employment. As Entin notes, 50 percent, 70 percent, or even 100 percent of the corporate tax is borne by workers.
- A 2012 Harvard Business Review piece by Mihir A. Desai notes that raising the corporate tax lands “straight on the back” of the American worker and will see a decline in real wages.
- A 2012 paper at the University of Warwick and University of Oxford found that a $1 increase in the corporate tax reduces wages by 92 cents in the long term. This study was conducted by Wiji Arulampalam, Michael P. Devereux, and Giorgia Maffini and studied over 55,000 businesses located in nine European countries over the period 1996-2003.
- Even the left-of-center Tax Policy Center estimates that 20 percent of the burden of the corporate income tax is borne by labor.
The tax would also harm consumers and workers, according to a recent National Bureau of Economic Research paper. This study found that 31 percent of the corporate tax rate is borne by consumers through higher prices and that 38 percent of the corporate tax is borne by workers through lower wages or less jobs.
Despite the Biden administration’s assertions, tax hikes won’t just hurt the wealthy – it will harm everyday Americans.
8. It acts as an admission by the Biden administration that its policies would do little to grow the economy.
The budget itself assumes 1.8 to 2 percent long run growth after its implementation. Currently, the CBO’s baseline assumes 1.7 percent long run growth. This means that, even in the Biden administration’s calculations, economic growth following the plan will hardly improve beyond the current baseline.
It’s likely that the plan’s multiple job-killing, investment-discouraging tax hikes will end up slowing economic growth. It is interesting, however, that the administration itself would expect such low growth from a plan that is supposed to create jobs, drive economic growth, and “build back better.”