How Biden’s New Tax Plan Could Undermine the U.S. Recovery

How Biden’s New Tax Plan Could Undermine the U.S. Recovery

Right now, it is the worst time possible to be considering tax hikes, as we saw the recent jobs numbers that drastically underperformed expectations.

Here's What You Need to Remember: Biden’s tax plan includes several other provisions such as enacting a 15 percent minimum tax on “book income” for corporations, pushing for an international agreement to impose global minimum corporate taxes, replacing fossil fuel subsidies with “green energy” incentives and increasing funding for the International Revenue Service. 

President Joe Biden’s pledge to “build back better” through a $2 trillion infrastructure overhaul promises to create jobs, boost investment and rebuild economic growth. To get there, the president proposed some of the largest business-tax increases that could, in fact, have the opposite effect than what’s outlined in the paradoxically named “American Jobs Plan.”

The plan includes a spate of tax provisions that targets wealthy individuals and major corporations and essentially reverses the 2017 tax cuts passed by former President Donald Trump, a tax bill that has pushed firms to shift profits to lower-tax jurisdictions, according to the Biden administration.

White House officials estimate that these policies would raise $2.5 trillion in tax revenue over the course of 15 years. While the bill does garner trillions of dollars in tax revenue, much of the Biden administration’s tax plans are particularly inimical to the U.S. economy and would create a bumpy path toward economic recovery, especially at a time when the country is suffering an economic and jobs crisis fueled by the coronavirus pandemic.

One key provision in the president’s proposed tax plan is to raise the corporate tax rate from 21 percent to 28 percent, which would bring the U.S. federal-state combined tax rate to 32.34 percent, making it the highest among all of the countries in the Organization for Economic Cooperation and Development (OECD) and among all of America’s major competitors, including China. That would certainly drive corporations overseas, harming the country’s competitiveness and cutting thousands of jobs that would normally exist within the nation’s borders. 

A study by the OECD found that the corporate tax rate is the “most harmful” for economic growth. Economists uncovered that increasing it by seven percent would reduce gross domestic product, slow wage growth and cost jobs across the country. The Tax Foundation reported that a 28 percent corporate tax rate would decrease GDP by 0.8 percent, reduce wages by 0.7 percent and eliminate 159,000 jobs.

And if the bill passes, it would come after a disappointing April jobs report that saw a slight increase in the unemployment rate and a lower-than-expected added number of jobs.

“The president’s proposed tax hikes would reduce wages, cost jobs, restrict economic growth and make America less competitive. All of that hurts real people,” Matthew D. Dickerson, the director of the Grover M. Hermann Center for the Federal Budget at the Heritage Foundation, said. “The president says he wants corporations to pay their fair share, but of course, corporations just pass those higher costs onto real people.”

Many middle- and- low-income households would inevitably bear the brunt of Biden’s tax hikes in the form of lower wages and higher prices for consumer goods and services, which reverses the president’s firm promise to not raise taxes on any American earning less than $400,000 per year, another tax provision of Biden’s infrastructure plan.

As Veronique de Rugy, a senior research fellow at George Mason University’s Mercatus Center, wrote, “The best explanation I’ve seen on this comes from a 2004 quote by economist Stephen Entin, who wrote, ‘The economic burden of a tax frequently does not rest with the person or business who has the statutory liability for paying the tax to the government.’ That’s because taxes are ultimately only paid by people.”

But the president’s proposal to increase taxes on individuals making more than $400,000 per year is widely unclear across his administration, as he’s reiterated that any person earning less than that amount would not experience a tax hike. White House press secretary Jen Psaki, however, announced during a press conference that the $400,000 limit refers to family income. But then days later, she said that Biden stands committed to his campaign promise that “nobody making under $400,000 a year will have their taxes increased.”

It’s still unclear which taxpayers will face the tax increases.

The president’s tax proposal also includes changes to international taxation by boosting the global intangible low-tax income (GILTI) to 21 percent, nearly double what multinational corporations currently pay on their GILTI liability, at 10.5 percent. The point of GILTI was to take aim at a company’s intangible assets like intellectual property, which includes patents and software.

The increased rate would likely push multinationals’ operations to a different country, as it would be more expensive for a corporation to be headquartered in the U.S. That would eradicate thousands of U.S. jobs, slowing a swift economic recovery after the Covid-19 crisis, and reduce wages at a time when millions of American families are struggling to pay essential bills like food and rent.

“There would be fewer people working for less money. That would be very damaging to the economy, as we’re struggling to try to recover,” Dickerson said.

The Tax Policy Center’s Thornton Matheson wrote, “This would put US firms at a disadvantage relative to foreign multinational enterprises… All else being equal, Biden’s proposal would likely reignite corporate inversions—transactions where US multinationals become foreign multinationals, usually through acquisition by a foreign company.”

Biden’s tax plan includes several other provisions such as enacting a 15 percent minimum tax on “book income” for corporations, pushing for an international agreement to impose global minimum corporate taxes, replacing fossil fuel subsidies with “green energy” incentives and increasing funding for the International Revenue Service. 

“Right now, it is the worst time possible to be considering tax hikes, as we saw the recent jobs numbers that drastically underperformed expectations. Now is the worst time to be talking about making it harder for companies to recover and hire workers for higher wages,” Dickerson said.

The “American Jobs Plan” would diminish the country’s competitiveness abroad and cut thousands of jobs, offering a complete reversal of what the White House seeks to do—to “build back better.”

Rachel Bucchino is a reporter at the National Interest. Her work has appeared in The Washington Post, U.S. News & World Report and The Hill. This article first appeared earlier this year.

Image: Reuters.