The U.S. elections should be a warning sign for businesses and families. The introduction of European-style labor rigidities, higher taxes, and large spending programs announced by Democratic presidential candidate Joe Biden should remind us of the negative impact on growth and jobs that those same policies created on many European Union countries.
Reversing Tax Cuts
Much of the Democratic platform’s tax plan seeks to partially or wholly reverse the changes introduced by the Tax Cuts and Jobs Act (TCJA). For example, the TCJA lowered the marginal tax rate on corporate income from 35 percent to 21 percent. The Biden plan would raise that rate to 28 percent, which would put the United States as the most uncompetitive corporate tax rate in the Organization for Economic Co-operation and Development (OECD), hurting investment and job creation.The Biden camp argues that the effective tax rate is lower. However, the effective tax rate is only a calculation after losses and double taxation, and it’s also lower than the marginal tax rate in all the OECD. Why does it matter to have an uncompetitive marginal tax rate? Because it hurts new business creation, new investment, and entrepreneurship.
The Biden plan would also impose a 15 percent minimum tax on book profits, as well as double the minimum tax on foreign intangible income from 10.5 percent to 21 percent. This policy already backfired during the Obama period and has proven to generate no real improvement in tax receipts.
Reapplying the 12.4 percent Social Security tax—currently capped at incomes up to $137,700—to incomes over $400,000 is a net salary cut for millions of workers in the United States, and ignores the fact that there’s already a large number of taxes on job creation and business implementation.
Biden’s plan is based on the wrong idea that the United States is a country of large corporations that make billions. These tax hikes will have a devastating effect on mid-sized and small businesses, increase the cost of labor, and make it more difficult to recover the economy.
The reality of these proposals, as we have seen in the United States and the European Union for years, is that spending becomes a long-term burden that keeps deficits above reasonable levels, and growth and employment weaken.
Unsustainable Spending
The Trump administration has focused its economic plan on spending and boosting growth with lower taxes because the United States needed to recover its competitiveness. However, spending increases cannot be a sustainable policy either in the future.Those who say that the deficit would have been solved by eliminating the Trump tax cuts have a problem with reality. There’s no way in which any form of revenue measure would have covered a $338 billion spending increase last fiscal year.
No serious economist can believe that keeping uncompetitive tax rates well above the average of the OECD will generate higher receipts and better growth. Furthermore, no serious economist can believe that eliminating the Trump tax cuts will generate more than $3 trillion of new and additional revenues to cover the spending plan of the Democratic candidate.
We must remember that corporate tax receipts already fell 1 percent in 2017 and 13 percent in 2016, before the Trump tax cuts, as investment and profits weakened.
The problem of the U.S. budget is and will continue to be mandatory spending; that’s why no serious candidate should propose a massive increase in that part of the budget.
Competitive Tax System
A serious economic plan for the United States must consider its position in the world and its opportunities. The United States can’t have a total tax wedge for investment and job creation that rises to almost double that of China and would put the United States as one of the most uncompetitive tax systems in the world.The Democratic candidate has often used the comparison with the Nordic countries as an example. The Nordic countries have more attractive tax wedges for businesses, capital, and job creation than the Biden plan proposes. What Biden willingly ignores is that what drives the Nordic countries’ tax burden higher are indirect taxes (Value Added Tax and green taxes on consumption), not taxes on investment and job creation.
The United States may recover faster than its economic peers if it maintains a competitive tax system and reigns over constantly increasing mandatory spending. If spending isn’t adjusted and controlled to be more efficient, the economy will fall into stagnation and high unemployment, even when the world economy recovers. It’s insane to try to compete with China with a confiscatory tax wedge. And it will not deliver better public services or growth.