Prior to the coronavirus pandemic and resulting national and state quarantine policies, the U.S. economy was booming like never before. The unemployment rate was at its lowest level since 1969. Real hourly earnings had risen to their highest levels since the fallout of the 2008-09 Great Recession, particularly among blue-collar workers. Real GDP growth exceeded expectations, including those of the nonpartisan Congressional Budget Office.
Many of the most vocal critics of the Trump administration were proven wrong. Some had initially speculated that the economy would never recover from the 2016 election. More reasonable critics remarked that the White House’s expectations for economic growth were too optimistic. Others even touted theories of “secular stagnation,” claiming that the United States was “stuck in neutral” and required a more expansionary fiscal policy.
The challenge for many of these critics is that they’ve made a number of predictions that haven’t come to pass. You cannot claim that the economy is going to collapse, but, after being falsified, credibly change your position to argue that the economy is just on a “sugar high.” The growth that we experienced leading up to the pandemic should come as no surprise: It was the result of regulatory and tax reform. While the Tax Cuts and Jobs Act (TCJA) was not perfect, it was a practical and important step forward.
Before TCJA, the U.S. had the highest combined statutory corporate income tax rate among the OECD nations at 38.9 percent, which was roughly 15 percentage points higher than the OECD average excluding the U.S. Although there might be disagreement over how long the initial boost in economic activity lasts following a tax cut, the best historical evidence repeatedly points to strong effects — reaffirmed by the most recent work on TCJA that incorporates dynamic feedback. These dynamic effects are integral to our modeling of the costs and benefits of tax policy since the economic growth effects all come down to the marginal cost of investment.
In the absence of congressional action, President Trump signed several executive orders to deliver economic relief to the public, including directing the Treasury secretary to defer the 6.2 percent Social Security tax on wages for employees making less than about $100,000 a year. Although the suspension would last from September 1 to December 31, Trump has promised to make it permanent if reelected.
Admittedly, this is far from ideal: Tax reform should be conducted by Congress. But the White House didn’t see any alternatives if the goal is to help people without giving into a wide array of policies that it believes would hurt the country, which is the case with the current version of the HEROES Act.
If presumptive Democratic presidential nominee Joe Biden wins the election, his administration would
seek one of the most progressive tax increases in modern history at $3.8 trillion. In fact, that’s over $2 trillion more than the tax increase proposed by Hillary Clinton in 2016. Here are some examples.
- Doubling the long-term capital gains rate from 23.8 percent to 43.4 percent by treating capital gains as ordinary income for those earning more than $1 million.
- Removing the “step-up in basis” feature of the “death tax,” which allows descendants to pass gains along to their heirs untaxed. Research suggests that the transmission of intergenerational assets has promoted the accumulation of wealth, particularly for small business owners and women, and that estate taxes discourage innovation.
- Requiring companies to pay a minimum tax for those with book profits of at least $100 million, which would discourage the very investments and job gains that Biden has touted on the campaign trail, ranging from manufacturing to renewable energy.
- Increasing the corporate tax rate from 21 percent to 28 percent, discouraging businesses from relocating to the U.S. and stifling all the gains that we’ve made in the past three years to reshore supply chains and strengthen the manufacturing and medical industrial base.
- Increasing the individual income tax rate for incomes of $400,000 and above from 37 percent to 39.6 percent and imposing a 12.4 percent payroll tax. Because both employers and employees would have to pay 6.2 percent in the Social Security tax, self-employed individuals would get the short end of the stick and further discourage already low rates of entrepreneurship.
The precise effects of Biden’s tax plan depend on specific modeling assumptions and additional specificity about the plan. But estimates by the Tax Foundation suggest that his plan would shrink the economy by 1.5 percent, reduce hourly wages by roughly 1 percent in the long-run and lead to 600,000 fewer full-time jobs due to higher marginal labor and capital tax rates.
The current tax structure is far from perfect. But raising taxes is not going to pave the way for economic mobility and shared prosperity — only growth will provide the means to sustain prosperity in the long-run. The economy was booming before the coronavirus hit. It’s time that academics and pundits got more intellectually honest in assessing various economic policies to respond to the pandemic, including Joe Biden’s tax plan.
Christos A. Makridis is an assistant research professor at Arizona State University, a non-resident fellow at Baylor University and a senior adviser at Gallup. Follow him on Twitter @camakridis. Jonathan P. Nauert is a private investor focused on small-businesses based in Scottsdale, Ariz.