The Biden Budget: Historic Levels of Government Spending, Harmful Tax Increases for Small Business and Private Sector

By at 13 March, 2024, 1:41 pm

by Raymond J. Keating – 

The budget plan offered by President Joe Biden shouldn’t have surprised anyone. After all, this is a budget focused on more federal government spending and higher taxes, and it lines up with previous Biden proposals. And if it were to become law, it would be a clear negative for the economy, including for entrepreneurs, small businesses and their employees.

GOP BUDGET RESOLUTION: Read SBE Council’s statement of support for the FY 2025 Budget Resolution by clicking the image above.

Record Levels of Federal Government Spending

The level of federal government spending that is reported and projected in the Biden plan would move the federal government into uncharted economic waters. The Biden budget projects annual federal outlays as a share of GDP continuing above 24 percent. That would be the first time in U.S. history that federal spending would run at such a level for an extended period of time.

Consider, for example, that federal outlays as a share of GDP averaged 20.6 percent from 1979 to 2019. (See chart below.) In fact, as President Bill Clinton was leaving office, federal outlays stood at 17.7 percent of GDP. Also, federal spending only briefly touched 23 percent or more during World War II (for a total of five years), the Great Recession (for three years) and the pandemic (for three years).

Under the Biden budget, however, spending as a share of GDP from 2024 through 2029 would average 24.4 percent, and never dip below 24 percent.

These Biden levels of spending would mean that federal outlays would be draining resources from or crowding out the private sector at unprecedented levels. That would serve as a significant drag on economic and income growth.

Destructive Tax Increases

Along with anti-growth levels of federal spending in the Biden budget come anti-growth tax increases. The long list of tax increases included in the Biden budget – which tally up to an estimated, breathtaking $5 trillion over ten years – reflect a combination of faulty economics, class warfare ideology and pandering politics.

Among the proposed tax increases are:

● The corporate income tax rate would increase by 33 percent – from 21 percent to 28 percent. In addition, the corporate minimum tax would be increased from 15 percent to 21 percent.

● The top personal income tax rate would increase from 37 percent to 39.6 percent.

● The top individual capital gains tax rate would almost double – jumping from 20 percent to 39.6 percent. And the top tax rate on carried interest also would increase from 20 percent to 39.6 percent.

● The additional Medicare income tax applied to wages, salary, and capital gains would increase for those making at least $400,000 from 3.8 percent to 5 percent.

● Biden would create a “wealth tax” on the total value of individuals’ assets of more than $100 million.

● The Biden tax hikes would include numerous levies targeted at U.S. energy producers – estimated at a minimum of $45 billion over 10 years (not counting the aforementioned corporate tax increase and other measure).

Indeed, the list continues. It must be noted that Biden tax increases will inflict harm on small businesses and individuals at all income levels.

Biden’s Disproportionate Tax-Hike Burden on Small Business

For example, higher taxes on corporations overwhelmingly is about tax increases on small businesses. Among employer C corporations in 2020 (latest data):

● 73.2 percent had fewer than 10 employees.

● 84.8 percent had fewer than 20 employees.

● 96.0 percent had fewer than 100 employees.

● 98.8 percent had less than 500 employees.

And when nonemployer corporations are factored in (latest data 2018), firms with fewer than 20 workers represented 89.7 percent of all C corporations, and the share with fewer than 10 employees registered 81.7 percent. Increase taxes on corporations, and you’re increasing taxes on small businesses.

As for higher taxes on upper-income earners, it turns out that higher income earners overwhelmingly are entrepreneurs and the investors who provide the funds and financing by which small businesses are launched and expand. It is wealthy individuals who have the resources to supply the financial capital that entrepreneurs need to grow new businesses, thereby driving economic and job growth. Make no mistake, entrepreneurs need wealthy people who have the resources to invest. In fact, just as labor and business owners need each other to make a business function and succeed, they also need individuals with the ability and willingness to lend and invest their capital.

Hence, the capital gains tax is a particularly destructive levy as it reduces the potential returns on entrepreneurship and investment, which are the engines of innovation, efficiency, business expansion, and growth in productivity, income, the economy and employment. The capital gains tax reduces the incentives and resources available for such essential activities.

And of course, when wealthy individuals choose not to invest, they consume goods and services, and even when it comes to luxury goods, for example, individuals up and down the income scale are involved in providing such goods.

Perhaps most notably, though, and as noted above, a solid majority of upper-income earners are entrepreneurs themselves, that is, owners and operators of their own businesses. CNBC, for example, has reported: “The 1% [in total wealth] own 57% of private companies, according to the Federal Reserve.” Edward Wolff, professor of economics at New York University, was quoted pointing out the following about the wealthiest: “Small business is really key when you talk about the sources of their wealth.” Increasing taxes on the wealthy means increasing taxes on small business. Does anyone really think that’s smart economics?

Finally, there’s the matter of the Biden administration repeatedly attacking or threatening U.S. energy producers via increased regulations and higher taxes. The fact that the U.S. has become the top oil and natural gas producer has been good news, worthy of celebration for U.S. consumers, businesses and workers. Nonetheless, ideological blinders don’t allow for such recognition by the Biden administration. And when politicians seek to undermine U.S. energy production, they are undermining American small businesses. According to the latest data from the U.S. Census Bureau (2021), 96 percent of employer firms in the oil and gas extraction sector have fewer than 100 employees, and in the support activities for oil and gas operations sector, 96 percent of employer firms have fewer than 100 workers.

Why go down the misguided path of more government spending and higher taxes? The answer is a combination of ideological bias, zero-sum thinking, and a love of and belief in trickle-down government. It’s certainly not about clear economic thinking. Economics tells us that raising taxes on a targeted group or industry – whether upper-income earners or the energy industry – inflicts direct harm on those entities. But the economic costs don’t stop there. Since our economy is deeply interrelated and intertwined, the ills spread far and wide. That perhaps is most glaringly the case when it comes to the upper-income earners targeted for tax increases who are small business owners and/or investors who provide capital for startups and growing businesses.

Many presidential budget proposals are pronounced dead on arrival on Capitol Hill. That would be a welcome and justified outcome for this Biden budget plan.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist, The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist and The Weekly Economist III: Another 52 Quick Reads to Help You Think Like an Economist.


News and Media Releases