What is a tax? Depending on who you ask, you will get a different answer. A necessary evil to fund the government some will say, others may try and paint it as a patriotic duty to pay taxes. The taxes as a patriotic duty argument is one I always found funny as it’s known that avoiding the tax man is America’s second favorite pastime, next to baseball. Those that try to paint it as our duty also seem to be the ones who do what they can to avoid paying them.
My answer is a tax meant to curb some sort of activity or behavior. Think of the cigarette taxes and how as taxes have increased on cigarettes over the years, it has had the direct effect of causing people to quit smoking. Tariffs on China, which caused many companies to rethink their sourcing strategies to either reshore production or move production to a country with a better trade relationship with the U.S. However, our government, as it continues to become more bloated than a dead whale, continues to think of taxes strictly as a source of revenue, with the left side of the aisle in particular continuing to use the one track thinking of higher taxes are better because that has to mean more revenue coming in. Sure, that may be the case, but only as far as the simplistic models used to generate revenue projections go. The assumptions made in those models are that corporations and workers are just going to accept the higher taxes and not try to do anything to reduce the amount of money they are giving to the government, so the reported impact of a tax increase will almost always give you the top line dollar amount of what the projected revenue would be after taxes are raised. What isn’t mentioned is a realistic projection after the entirety of the proposal is modeled, nor does anyone mention the economic impact of raising taxes .
The below data is from a study of Biden’s tax plan done by the Tax Foundation. Interesting notes are the impact to GDP and job growth, which are the things you don’t hear about when the topic of raising taxes is broached. What also isn’t publicized are the tax credits that also get thrown in to protect allies or subsidize pet projects. We’ll start with the economic impact and walk back to discuss a few of the more puzzling parts of the tax plan:
Long Run Economic Effects of Biden’s Tax Plan:
- Reduces GDP by 1.62%. — Now you may see that and say, 1.62%, that doesn’t sound like much. But, the U.S. economy is $21 trillion, and a reduction of 1.62% from that is a loss of $340 billion, which is slightly less than Amazon’s total sales for 2020. Also, loss of GDP equates to loss of production, which in turn equals loss of jobs which means loss of tax revenue, which cuts into an already overly optimistic view of what the tax increase would generate revenue wise.
- Reduces the wage rate by 1.15%, depressed wages equal less tax revenue. — Corporations will protect their margins, so that has to come from somewhere, and it most often comes from cutting salaries, or giving little to no wage increases. Raises in salary mean raises in taxes paid, especially as an employee is given a raise that moves them to a higher tax bracket. Lost jobs also figure in here, and people not working do not generate income from which taxes can be extracted.
- 542,000 less jobs being created. — Here’s 542,000 tax payers not even entering the workforce because of short sighted policy. 542,000 people who will not pay a cent in taxes, taking millions, if not billions out of the potential tax revenues.
Key points of Biden tax plan:
- Raises corporate tax rate from 21% to 28%. — Companies do not pay these taxes, consumers of their products and services do. The employees also do through little to no pay raises or lost jobs. Corporations will do what it takes to protect their margins, and taxes impact those margins, so they will raise prices, depress wage increases, cut bonuses to the rank and file worker, and lay off employees to make sure their margins are not impacted. Raising taxes on corporations is nothing more than a talking point aimed at providing a scapegoat for our politicians profligate spending.
- Re-establishes the First-Time Homebuyers’ Tax Credit, Biden’s plan calls for up to $15,000 for first time homebuyers. — The housing market is already extremely tight and has been for years now as interest rates have been at or near historic lows. Why do we need to throw more money and incentive into the housing market? The low interest rates are incentive enough. Yet, the Biden (Obama 2.0) plan calls for throwing more money into an already overheated market. Inflation is hitting the housing market because of scarcity, adding tax credit incentivized buyers into the market are only going to compound the inflation. And at any rate, I thought the point of raising taxes was to increase revenue to cover budgetary shortfalls and start paying down some of the national debt, not raise taxes so it can be parsed out to a sector of the economy that doesn’t need it.
- Imposes a 12.4 percent Old-Age, Survivors, and Disability Insurance (Social Security) payroll tax on income earned above $400,000, evenly split between employers and employees. This would create a “donut hole” in the current Social Security payroll tax, where wages between $137,700, the current wage cap, and $400,000 are not taxed. – Once again, corporations won’t pay this, consumers will in the form of higher prices, so that leaves the executives of these companies on the hook, who in the case of publicly held companies, will be likely to ask for more stock options in lieu of actual monetary compensation to avoid paying this tax.
What gets me is some people that actually advocate for higher taxes. By all means, if you feel that you aren’t paying your fair share, feel free to give the government more of your paycheck, they certainly won’t turn it down. I’m going to guess those that advocate for higher taxes are the first in line when it comes time to file their taxes when they are due a refund. I’m guessing they don’t let Uncle Sam keep the overage. Why not? Because very few people actually vote to have their taxes increased. They want other people’s taxes increased, particularly the rich, but not their own. And as you can see from the few examples above, the government’s intention is to just waste the money in unnecessary credits anyway.
History shows that lower taxes actually increases tax revenue. Why is that? It goes back to my views on taxes. They are meant to be a deterrent to some sort of activity. An increase in taxes on corporations will result in less investment and less hiring as they look to protect margins. It deters hiring and investment, stifling innovation. There is no return on investment in paying taxes. There is no payback on taxes paid to the government. My $100,000 investment on a piece of automation equipment for my business may return that investment to me in 2 years as it replaced someone who was making $50,000 per year, and also allowed me to deploy that person to another area of need. My $100,000 paid in taxes returns no value to me or my business and is lost forever to whatever the government pissed it away on. It also means I don’t have the ability to take that money and re-invest in my business, making it potentially less productive, which in turn means it generates less tax revenue. If the goal is to curb hiring and investment in business, then raise taxes. An increase in taxes makes individuals find ways to avoid them. It deters them from paying taxes as they get no good or service of value in return. I can put down $50,000 and have a nice down payment on a house, I have the tangible benefit of a place to live. I pay $50,000 in taxes to the government, and I get no tangible benefit in return. Giving money away to a wasteful entity such as the government removes productive money from the consumer that they could then use to buy goods and services that would help grow the economy, and in turn generate tax revenue.
Lower taxes means encouraging things like more investment in a business, which means more innovations and generally speaking, more jobs. More jobs, means more people paying income taxes, thus increasing revenue as the base of taxpayers increases. Think about this for a moment. What is going to generate more in tax revenue, an individual with a steady job paying $20 an hour and getting raises annually, or someone who is unemployed for an extended period of time, maybe getting half of an annual salary through unemployment benefits and paying taxes on it, or worst case scenario, receiving not income at all? What our politicians, particularly those on the left, miss, is this is a numbers game not from a tax rate perspective, but from the amount of people paying into the system perspective. An increase in tax rates is bad, as it shrinks the tax base because taxation shapes behavior, causing less/lost revenue. What really needs to be increased is the number of people paying taxes, as it grows the amount of people paying into the system, generating more revenue. If our elected officials would focus less on punishing the successful with higher taxes, and look towards growing the base of taxpayers, our budget as a country may end up in better shape.