Ranking the Biden Tax Increases According to Harm Inflicted on the Economy

By SBE Council at 1 October, 2021, 10:58 am

by Raymond J. Keating –

President Joe Biden arrived in office with a long list of tax increases he was looking to impose on American entrepreneurs, businesses, individuals and families. A new study prepared for the Small Business & Entrepreneurship Council (SBE Council) by EY QUEST takes five significant tax increases being sought, and ranks them according to how harmful they would be for the economy.

As noted in this study, each of the major tax increases proposed by President Biden would hold significant negatives for the U.S. economy.

The five tax increases examined were:

Corporate Income Tax. Increasing the corporate income tax rate from 21 percent to 28 percent.

Top Individual Tax Rate. Increasing the top individual income tax rate from 37 percent (plus 3.8 percent Medicare income tax) to 39.6 percent (plus 3.8 percent Medicare income tax).

Dividends Tax. Taxing qualified dividends as ordinary income, increasing the top tax rate from 23.8 percent (20 percent plus the 3.8 percent Medicare income tax (or the net investment income tax)) to 43.4 percent (39.6 percent plus 3.8 percent).

Self-Employment Tax. Expand self-employment income subject to the 3.8 percent net investment income tax for taxpayers with incomes over $400,000, raising the tax rate from 37 percent to 43.4 percent.

Capital Gains Tax. Taxing long-term capital gains as ordinary income for taxpayers with income over $1 million, increasing ordinary income tax rates on long-term capital gains (increasing the top rate from 23.8 percent to 43.4 percent), and taxing capital gains at death, that is, repealing the step-up basis.

It is noted in the report:

“Each of these policies is likely to have significant implications for the US economy. Taxes on capital decrease the after-tax return to investment, which can be expected to reduce investment and the capital stock. Ultimately, workers can be expected to have less capital with which to work, which reduces the productive capacity of the US economy, the wages of workers, and living standards. Taxes on labor decrease the after-tax return to work, which can be expected to reduce both the number of workers and the number of hours they work.”

The study’s index “encapsulates and compares the relative efficiency of each policy measured by its impact on GDP per dollar of revenue.” Key findings include:

● “The proposals to increase taxes on capital gains are, as a group, the most economically harmful in terms of their adverse impact on GDP per dollar of revenue either over the 10-year budget window or in the long run.”

● “Taxing qualified dividends is the second most harmful of the policies ranked, followed by increasing the top corporate income tax rate to 28%, increasing the top individual tax rate to 39.6%, and subjecting self-employment income to the 3.8% net investment income tax.”

It is not surprising to see that out of the major tax hikes examined, the significant increases proposed for capital gains taxes would inflict the greatest harm, followed by the increases in the dividends tax and the corporate income tax. These effectively are the largest tax increases in the Biden plan, and they are focused on capital income.

Higher taxes on capital income mean higher costs and reduced incentives for such economically essential undertaking as entrepreneurship and investment. In turn, innovation, productivity, wages and employment suffer.

As SBE Council president & CEO Karen Kerrigan noted in a media release about the study’s findings:

“These significant tax increases strike at the heart and soul of a vibrant, innovative and dynamic economy, which is all about capital access and formation and incentives for investment, risk-taking and entrepreneurship. Taxing more means our economy gets less productive activity. That means fewer startups, weaker Main Street businesses, less innovation and quality job growth, along with the destruction of local legacy businesses, which are economic drivers and stable employers in local communities nationwide. For example, higher capital gains taxes and retroactive capital gains taxes at death would devastate businesses and business formation and lead to consolidation, concentration and economic stagnation.”

Make no mistake, there’s nothing positive among these Biden tax increases. Instead, as noted in the study, it’s just a matter of how harmful the economic effects of each tax increase would be.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.