ERROR
Main Error Mesage Here
More detailed message would go here to provide context for the user and how to proceed
ERROR
Main Error Mesage Here
More detailed message would go here to provide context for the user and how to proceed
search
Close Nav

Undermining Success

back to top
eye on the news

Undermining Success

President Biden needs economic prosperity to pay for his many programs, but his tax plan will thwart business incentives. May 3, 2021
Politics and law
Economy, finance, and budgets

When President Biden claims that business taxes will “pay” for his many proposed programs, he demonstrates that he and his White House team have lost the economic thread. Those taxes would impose huge disincentives on the very elements of the economy that Biden needs to “build back better,” as his slogan has it. Only American business can make the technological advances, create the jobs, and deliver the prosperity that the president wants—but Biden’s plans would impede its ability to do this.

To “pay” for his schemes, the president has proposed an array of burdens on business. His list is long. Here are its major elements: Biden would raise corporate tax rates by one-third, from 21 percent today to 28 percent, a figure considerably higher than in most of the developed world. He would insist that any American firm pay the full U.S. tax rate on overseas earnings should its management repatriate the funds held abroad—say, to expand its domestic operations. He would demand a tax hike—by two-thirds the current rate—on any capital gains made in the course of business or from investing, raising the rate from a maximum of 23.8 percent today to just under 40 percent. The president would disallow the common practice among real-estate developers to trade properties without tax consequences and impose a capital gains tax on any such activities. He would further insist that those who invest in startups and other forms of entrepreneurial activity—primarily hedge funds and private-equity investors—pay tax on their gains at the higher rate levied on ordinary income and not, as they do now in what is referred to as “carried interest,” at the lower capital gains rate.

White House rhetoric refers to these increased taxes simply as business’s “fair share.” Moral judgments of this sort are always slippery, but even if that claim were reasonable, it would still miss the practical economic point. Every business manager knows that huge risks accompany any spending to expand operations, hire new workers, engage in research, or upgrade products and practices. They weigh the potential for gain against those real possibilities of loss. By taking a large chunk of any gains that business might accrue from making such efforts and taking these risks, the White House would effectively bias this critical business calculation against all the things Biden wants and needs to make his programs a success. It’s a bad bargain and not an especially “fair” one: your losses are your own, but Washington will take much of any gain. In effect, the White House has built failure into the basic structure of its plans.

So far, most of the business community has taken a wait-and-see approach to the president’s proposals and abstained from weighing in on the matter. Hedge funds and private-equity mangers have, however, spoken out, perhaps because they, unlike the giant corporations that dominate bodies like the Chamber of Commerce, are closer to the nation’s entrepreneurs. Drew Maloney, president and chief executive of private-equity trading group the American Investment Council, argued recently: “Instead of moving forward with tax increases that discourage investment in businesses, workers and innovation, the administration and Congress should deliver policies that will put more private investment to work for families across the country.” To be sure, the plea is self-serving, and it is hard to generate much sympathy for a group noted for its extreme wealth. But neither wealth nor self-service necessarily invalidate the argument.

Economic research—since forever, it seems—has consistently verified the old truism that the more government taxes something, the less of it the economy gets. Biden proposes to tax production, growth, and investment—and by implication, job creation. He will get less of it. His programs consequently will miss the extensions and enlargements that a motivated business community would otherwise offer. And as the economy misses these benefits, so, too, Washington will see less of the revenues that the White House has estimated these tax plans will generate. The administration’s plans, then, will not only fail to get the economic response it seeks but will also sink the nation deeper in debt than the president claims. If Biden wants to finance his programs, he might consider sparing research, production, and hiring, and tax something that he wants less of—say, carbon. Doing that would pose its own problems, of course, but at least it would have the benefit of a logical calculation.

Photo by Melina Mara/The Washington Post via Getty Images

Up Next
eye on the news

Here We Go Again

Biden’s infrastructure plan will fail for the same reasons that Obama’s did.
Milton Ezrati April 14, 2021
Infrastructure and energy
Politics and law

Contact

Send a question or comment using the form below. This message may be routed through support staff.

Saved!
Close