President Biden’s Sweeping Proposed Tax Law Changes: Is This the Right Time?
On the night of Wednesday, April 28, President Biden addressed a joint session of Congress and unveiled the second portion of his Build Back Better agenda – the American Families Plan, a $1.6–$2 trillion social infrastructure/human capital initiative focused on fighting poverty, investing in childcare and education (free community college), improving workforce development, and potentially expanding health insurance subsidies. The proposal seeks to raise $1.5 trillion over a decade via higher taxes on the top 1%. Biden plans to finance the plan primarily through tax changes aimed at upper-income taxpayers, defined as individuals and married couples making more than $400,000 a year.
Here were his proposed major tax changes:
- No tax increases for anyone making $400,000 or less.
- The top income tax rate would be raised to 39.6%, which would apply to the top 1% of Americans.
- The long-term capital gains rate would double, from 20% to 39.6% — the same rate as the top 1%’s wages.
- Capital gains tax would be imposed on the appreciation of any unsold assets — also known as unrealized gains —upon the owner’s death. This could be as high as 43.4% for the wealthiest households.
- The IRS will gain resources to enhance tax audits of households with more than $400,000 of income, hoping to raise $700 billion over a decade.
- The richest 1% of taxpayers, who have an average income of $2.2 million, would shoulder the burden of the tax hike, according to an analysis published by the Institute on Taxation and Economic Policy. Two-thirds of this group would see their taxes increase by an average of $159,000 a year.
Here’s the fundamental problem with this proposal: raising taxes doesn’t work, and in the wake of the destruction that COVID-19 has visited upon our economy, this isn’t the right time.
Raising taxes didn’t work when they did it in New York or California. A few years ago, when the income tax level came down to the lowest of all time with the lowest unemployment, we saw the corporations return to the United States. Now that we’re raising taxes for the corporations and the highest earners, they’ll flee to international tax havens like Canada and Ireland. And if raising taxes on the top 1% didn’t work on the state level, it’s certainly not going to work at the global level. I’m concerned that this move will hurt the economy rather than help it as intended.
Much has been made of the fact that Biden has assigned a $400,000 income cutoff level for imposing new taxes. The fallacy with that concept is, higher earners will always find new ways in our tax system to preserve wealth; they always do. They’ll set up offshore accounts and utilize tax depreciation to minimize their taxes.
What President Biden is really proposing is a burden on the middle class and the lower class. That’s what always happens when taxes are hiked on the drivers of our economy. They’re going to take the jobs offshore, and when they’re pull their money offshore, that’s going to create hyperinflation—and that’s going to hurt the middle class.
My other major concern is: how are we going to pay for all the ambitious projects Biden outlined in his Wednesday night address? At this rate, his out-of-control spending will run up the national debt to 15% of our Gross National Product. Eventually the bottom is going to fall out of our economy.
By the way, do you know that only 6% of his infrastructure bill actually goes to infrastructure, to job creation? The rest goes to the social redistribution of wealth from taxpayers to nontaxpayers. That doesn’t create jobs—it creates dependency.
As someone who helped advise on the 2017 Tax and Jobs Act, I’m concerned President Biden’s proposed sweeping changes to the U.S. tax law could have the unintended consequence of undermining his ambitious social agenda. By unfairly burdening America’s top earners, he could well end up slaying the goose that lays the golden eggs.