Backdoor Tax on The Middle Class and Poor

Yesterday President Biden unveiled his infrastructure plan.  Trllions, but only $157MM dedicated to infrastructure.  It’s typical of the pork we see in Washington and why our national debt continues to balloon.  By the way, in negotiation you are trained to put out as wild a proposal as possible first so that everyone anchors on it.  Then, when it’s negotiated down, you get what you really wanted.  In this case, establishment Republicans will crow how they got the bill down and how much money they saved on the deficit when we all know that the deficit will balloon.  We also know the GDP multiple of government spending is close to zero so the money will just line cronies pockets and little will get done to help the commoners.

How does Biden propose paying for it?

The wealthy and corporations of course!

The funny thing is that for “not doing their fair share”, it’s worth remembering the top 5% of income earners pay most of the taxes in the US.  60%!

It’s great soundbite politics.  Wealthy politicians like Illinois governor JB Pritzker and Secretary of Climate John Kerry and Senator Mark Warner say, “Tax me more.  I am rich.  I should pay more in taxes.”  Meanwhile, they structure their estates and domiciles to make sure they pay the minimum in taxes.

By the way, when you are as wealthy as the above people, most of your income doesn’t come from actually working.  Your nest egg makes you money and you pay at the long-term capital gains rate.  If the wealthy that wanted to pay more in tax really wanted to pay more, they could just send it in.  But, even when you ask the leftiest of the lefty’s who advocate for higher taxes their response is usually, “I won’t do it unless everyone else has to do it.”

I would wager that most people do not understand accounting well enough to understand the true ramifications of tax bills.  I don’t think they truly “get” it when taxes go down or up how the incentives change.  Taxes truly are economic incentives for behavior. That’s why climate change advocates grab their pitchforks and demand extra taxes on fossil fuels or carbon credits to charge against taxes.  It’s also why pro-life advocates grab their pitchforks and demand better tax treatment for children and families.

Why did wages go up under Trump?  Huge decrease in the corporate tax rate and the ability of those multinational corporations to bring funds sitting in offshore accounts back to the US.  Trillions came back to the US under Trump.  Prior to Trump, corporations barely repatriated $500B.  The academic finance research on corporate tax rates is lower corporate tax rates result in higher wages. Higher after-tax income and lower tax rates change the internal corporate hurdle rate for domestic corporate investment.   Companies increase wages to employees, and they also invest more in property, plant, and equipment spurring more employment for more employees.

Ain’t capitalism great?!

Remember, almost everyone in America pays tax at what is known as the Hauser Rate.  That’s due to all sorts of factors.

Let’s take a quick peek at the Biden tax plan and see how he is proposing to change the tax code.

• Corporate tax rates would go up from 21% to 28%.  But that’s not all.  Corporate inversions would be banned.  This is where a company changes its domicile to benefit its shareholders.  Multinational corporations would be subject to a minimum tax of 21%, making it one of the highest in the entire world.  That means lower wages for workers, and higher prices for consumers as corporations pass on the cost.
• Income tax top rate would go to 39.5%.  This is a disincentive to making money.  Making money is associated with higher production and higher standards of living.  Having more money also is equal to more freedom.  Crushing to the middle class.  This higher rate would also affect lots of small businesses causing them to lay off, not hire new, or pay employees less.
• Payroll taxes would increase.  That takes money right out of middle-class workers’ paychecks.
• Significantly higher capital gains taxes.  This is a disincentive to investment.  It also causes non-productive or degraded assets to freeze in portfolios. Why sell to someone who can turn it into a productive asset increasing productivity and employment when you can cheaply hold and do nothing?  Higher capital gains will also not be viewed well in the stock market.
• Taxing unrealized gains at death.  When you die, you have estate taxes you might have to pay.  If you hold stocks, assets or anything else in your estate, your heirs must value it at the current value and pay the tax on the gain even if you don’t sell.  Remember, Congress bipartisanly moved to aggressively tax retirement savings passed on to heirs last year.  Of course, you will have to pay someone to revalue all the assets along with paying Uncle Sugar the assessed taxes on the new valuation.
• Boosting the estate tax.  If you have an estate of $3.5MM, you get aggressively taxed at 45% upon death.  Remember, you already paid a lot of tax on this as you built your nest egg.   Of course, multi-millionaires and billionaires won’t because they can afford fancy accountants and lawyers to avoid the tax.  But, an upper-middle-class person that has saved their entire life won’t be able to avoid the tax.  Their heirs will get crushed.

Ignore all the chatter about how if you make less than $400,000 a year, you will be fine.  The average person will be fleeced blindly just by the proposed change in corporate tax policy, the change in payroll taxes, and increasing the highest tax rates.

Combine the increased taxes with the flood of illegal immigrants and change in other immigration policies and it will put downward pressure on wages.  The other thing that has been a huge disincentive to work is the hefty transfer payments the government has paid during Covid.  Anecdotally, my friends that run big and small companies are finding it really hard to get anyone to work even at higher wages since they make just as much staying home.

What tax policy should do is create incentives to work and incentives to invest.  President Biden does none of that and in fact, creates disincentives to work and invest.  It’s as if he just wants everyone sitting at home alone with a mask on.  That couldn’t be it could it?

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