Enjoy Tax Day 2021. They Just Get Worse From Here.
Tax hikes and growing debt guarantee shared pain in a hobbled economy.
Happy Tax Day! True, April 15 is a bit less momentous than usual this year, because the IRS and many state revenue agencies extended the deadline for filing tax returns and making payments to accommodate economic troubles caused by the pandemic and lockdowns. Still, those of us accustomed to the usual date can't help but dread the coming of mid-April. This year, that dread is even more appropriate if you recognize that taxation is theft and anticipate rougher muggings than usual in years to come, courtesy of the Biden administration's ambitious tax proposals.
"Democrats have spent the last several years clamoring to raise taxes on corporations and the rich," Jim Tankersley and Emily Cochrane noted for The New York Times in March. "Now, under President Biden, they have a shot at ushering in the largest federal tax increase since 1942."
Such a dramatically large tax increase is impressive, but what's even more impressive is that it still isn't enough to cover President Joe Biden's spending plans. "Aides suggest his proposals might not be entirely paid for, with some one-time spending increases offset by increased federal borrowing," added Tankersley and Emily Cochrane.
In fact, "the largest federal tax increase since 1942" is sufficient to cover only a small part of the trillions of dollars in spending already passed and under consideration by the federal government.
"Biden plans to splurge $11 trillion in additional spending over a decade," Reason contributing editor Veronique de Rugy observed earlier this month. "Meanwhile, his proposed tax hikes are estimated to reap $2.1 to $2.8 trillion. In other words, for every $5 or $6 in new spending, $1 will be paid for in new taxes, and the rest goes on the nation's credit card."
That's a double whammy of pain, because there are costs to both higher taxes and soaring debt.
The easiest sell for the administration is a big hike in the corporate tax rate, because seemingly everybody is angry at corporations right now and they're relatively faceless, easy targets. The president proposes to raise the corporate tax rate from the current 21 percent, which is about the middle of the pack among developed countries, to 28 percent, which is more than triple Switzerland's 8.5 percent and almost twice the 15 percent charged by Canada (Canadian provinces and Swiss cantons also impose additional taxes, just like U.S. states).
Aware that such a high tax rate might make the United States an unattractive place for companies to base themselves, U.S. Treasury Secretary Janet Yellen advocates a "global minimum corporate tax rate that can stop the race to the bottom." Of course, imposing that tax would require the cooperation of governments that might benefit more easily by offering an attractive low-tax alternative to Yellen and company.
But corporations are just ways of organizing group efforts by human beings, and those people ultimately pay taxes.
"The burden is shared among stockholders and, unintuitively, among a broader group of workers and investors," observes the Tax Policy Center, a project of the Urban Institute and the Brookings Institution. "[T]he Urban-Brookings Tax Policy Center (TPC) assumes investment returns (dividends, interest, capital gains, etc.) bear 80 percent of the burden, with wages and other labor income carrying the remaining 20 percent."
Tax policy may aim at big, bad corporations, but it ultimately hits retirement investments and paychecks.
Another easy target is "the rich," because few people consider themselves in that category until the term is redefined in unexpected ways. What it means at the moment isn't clear because Biden says his plan "won't raise a penny tax on a family making less than $400,000 a year," while Jen Psaki, his press secretary, insists the proposal "will not raise taxes on any individual or family" under the cutoff, which isn't the same thing. Even if most Americans ultimately make less than the magic threshold, a lot more people are in for rougher future muggings from higher income taxes. And even lower-income individuals and families will suffer from an economy depressed by higher spending, soaring taxes, and growing debt.
"The general finding is that increasing taxes leads to lower GDP and personal consumption," the Congressional Budget Office (CBO) warned last month of the consequences of higher taxes to finance increased government expenditures. "After 10 years, the level of GDP by 2030 is between 3 percent and 10 percent lower than it would be without the increase in expenditures and revenues."
The CBO also warned that revenues collected by the federal government from hikes across three possible tax policies affecting income and capital will shrink without adjustment because people will work less, reduce investments, and even leave the labor force in response to the government's increased take. "To maintain deficit neutrality, tax rates for all three tax policies must rise over time to offset behavioral responses that result in smaller tax bases."
Those continuing deficits—remember that even "the largest federal tax increase since 1942" isn't sufficient to cover spending plans—will add on to a debt that's been accumulating for a federal government that hasn't balanced a budget in 20 years. Even before the spending spree of the past year, federal debt was expected to hit 98 percent of GDP in 2030. Debt at that level "would dampen economic output" and servicing it would inevitably "reduce the income of U.S. households," the Congressional Budget Office predicted. Debt will now be much higher as a share of GDP as a result of trillions of dollars in additional spending, with all of the pain that implies.
That pain from the growing national debt will add on to the pain of soaring taxes that are insufficient to offset that debt. It all adds up to a shared experience that just might live up to Biden's call for "uniting our nation." Misery loves company, after all.
So, happy Tax Day. Get what enjoyment you can from this year's events, because the muggings to come will be a lot rougher.
