Biden’s backwards budget

On the 28th of March, President Biden set out his $5.8 trillion budget proposal for 2023. One of the largest in American history, this historic piece of legislation outlines $4.1 trillion as part of an American ‘Jobs and Rescue plan’ alongside an additional $1.7 trillion in discretionary spending. Proposed tax increases in this bill amount to $3.6 trillion – the largest tax increase in American history. As a result, the budget represents a disaster for Americans. Job-killing tax hikes and wasteful government spending fail to address the current cost-of-living crisis. Inflation will likely continue to spiral out of control as government deficits are projected to increase if this budget is to pass. The low-tax, low inflation, high wage American economy that has prospered for 40-years looks to be coming to an end, as tax hikes and rampant inflation take us back to the stagflation days of the 1970s.

‘Billionaire Tax’

The Biden administration looks to implement an unprecedented tax on unrealised capital gains that will likely reduce investment and share prices for decades to come. This constitutes a 20% minimum tax on households with a net worth of more than $100 million. Capital gains tax normally applies once individuals have liquidated their assets; the introduction of this minimum tax will lead to double taxation. In many cases, rising asset prices may not be an indication of future income as these values can easily fall. As a result, entrepreneurs and investors could end up being taxed on negative ‘income’ of $100 million and over.

In addition, wealthy individuals will be punished for reinvesting to grow their businesses. Innovative industries such as the tech sector will be particularly disadvantaged by this tax proposal, as Silicon Valley relies on wealthy individuals taking large risks with their capital to drive growth and entrepreneurship. The result is stagnant economic growth as venture capital firms halt entrepreneurial investments into startups and small businesses. This tax intends to raise revenues for government spending; this begs the question of whether investments should be made by the efficient private sector or wasteful government bureaucrats?

Middle-class Americans will not only suffer a lack of innovation but also from lower share prices. As wealthier individuals look to park their capital abroad to avoid the new minimum tax, less money will be invested into index funds and stocks. Lower stock market gains will follow, hurting the investment income of more than 50% of Americans invested in the stock market. At the same time, retirement savings for the tens of millions of Americans with Roth IRAs will be negatively impacted by worse market performance.

Oppressive taxes

Capital gains tax hikes that promise to further deplete investment when coupled with the ‘billionaire tax’ have also been included in the budget. Raising the capital gains tax in line with federal income taxes is being proposed, pushing the top marginal rate from 20% to 39.6%. The economic illiterates of the Biden administration fail to reconcile that capital gains tax cuts have historically boosted tax receipts time and time again. In 1980, the capital gains top rate was slashed from 27.5% to 20%. The result was a five-fold increase in tax receipts, from $20 billion to $110 billion between 1982 and 1987 (adjusted for inflation). However, following the reversal of this tax cut by the Democratic-controlled Congress in 1987, capital gains tax revenues fell drastically. The same phenomenon was witnessed under Clinton during the late-1990s. With help from the Republican congress, the top rate was once again slashed to around 20%. Capital gains tax revenues increased from $90 billion to $150 billion in just three years following this tax cut. Increases in tax receipts can be attributed to the explosion in economic growth that follows once punitive taxes that discourage private-sector investment are slashed. Biden looks to raise the top rate to levels not seen since the 1970s – a period of falling real wages and living standards for Americans.

“Some people say that taxes are the price we pay for civilisation. But the runaway taxes of our time are the price we pay for being gullible”

Thomas Sowell

Corporate tax hikes are also part of the Biden agenda. The administration looks to partially reverse the corporate tax cuts implemented under former President Trump. Under the previous Republican administration, the top corporate tax rate was cut from 35% to 21% in 2017; the Democrats look to bring this figure to 28%. Whilst initially corporate tax revenues fell following Trump’s corporate tax reduction, revenues have since then skyrocketed. In 2021, tax receipts were 25% higher than they were in 2017. Corporate tax revenues are projected to continue to grow, expected to be over 50% higher than in 2017. This can be attributed to the strong economic growth and lower tax avoidance that is consistent with lower corporate tax rates. As businesses have more retained profit, further investments into the economy follow. It is of little surprise that the Trump administration saw unemployment fall to levels not seen since WW2, as businesses expanded production and boosted economic activity. Biden’s corporate tax raid will reverse this prosperity, as tax receipts will likely not climb as anticipated with sluggish economic growth from higher corporate tax rates.

Energy

The past year has seen oil prices climb to unprecedented levels; since the start of 2021, the price of Brent crude oil per barrel has climbed by over 100%. This has resulted in gas prices skyrocketing, making refuelling a much more costly expense for American households. Biden’s response to tackling spiralling energy costs is disastrous. The budget includes a provision that eliminates fossil fuel subsidies to the tune of $3.3 billion annually. Eliminating these tax breaks for oil-producing firms will only push oil prices higher as fossil fuel companies limit investment into energy production. At a time when oil production should be incentivised to increase supply within the market, the Biden administration looks to make it more costly to boost oil production. The result will be ever-climbing energy costs, hurting households as oil price inflation continues to squeeze budgets.

Ultimately, the Biden ‘tax and spend plan’ represents a disaster for the American economy. Implementing an unprecedented tax on unrealised gains will have a catastrophic effect on investment, resulting in less innovation and prosperity for years to come. Economic ‘experts’ within the Biden administration have failed to reconcile the decrease in projected tax revenue that will likely result from increasing both corporation and capital gains taxes. Historically, cutting these taxes has unleashed economic growth and activity that has spurred greater tax revenues, by removing the barriers to investment that hinder economic prosperity. Ending fossil fuel subsidies at a time of sky-high gas prices at the pump is a slap in the face to households who will continue to see disposable incomes shrink as investment into oil production falls.