We’ve all (well, many of us) been hearing about Joe’s plan to go after capital gains and corporate taxes. The proposed doubling of the capital gains will be something to address in more detail later, as that impacts way, way more than those “rich corporations and wealthiest individuals”.
Let’s talk corporate tax rates. We’ve heard the proposal to increase corporate rates to 28%, from the current 21%. Reviewing that first, it’s important to note that this rate puts the US at the top of most nations’ tax rates; however, when combined with corporate STATE tax rates, e.g., California and New York, those rates suddenly pass 40%, and in those two aforementioned states, over 50%. In most states the combined rate will average over 32.3% – placing us at the highest rate among the G7 countries. China is at 25%, incidentally. It is estimated to eliminate (read: move offshore) at least 159,000 jobs, and lower domestic output (equate to GDP) of 0.8%. The bottom 20% earners – not the top 20%, the bottom – would see a net decrease in earnings of almost 1.5% due to these increased taxes.
But there’s more: The “Gilti” tax (Global Intangible Low-Tax Income) was taxed at the full rate prior to the 2017 Trump reforms when profits were brought onshore; in 2017 they cut the rate in half, to encourage bringing that money onshore for reinvestment. It worked. The rate was set at 10.5%. Biden wants to double that to 21%. With additional Trump reforms (loophole closing) that effective rate was actually 13% (they were only allowed to credit 80% of foreign taxes paid); the new proposal, therefore, makes the effective rate over 26%. This effective rate is significantly higher than even most western Euro countries’ statutory rates. Net net – it moved the US from competitive to significantly less competitive.
The Biden team, and Yelland, wants to introduce a global minimum tax of 15%. So far the OECD (Org for Economic Cooperation and Development) isn’t returning those phone calls from Biden’s team to consider this idea.
The other area of interest is the treatment for LLCs, S-corps, and C-corps. This one was originally going to go hard after those smaller business owners, generating $1.3T in revenues, that pass-through profits and losses on Schedule C’s on personal tax returns. This is a lifeblood practice that enables small business overall. Biden’s plan started as moving those business entities to the full corporate rate. Recently the talk is over splitting the rate difference, but still not allowing the personal rate. This debate is ongoing, as it is receiving huge backlash on both sides, as is the overall new proposed corporate rates. Needless to say, I’ll save my review of this one until we see more of the final product (Biden is speaking on part of this tomorrow night).
We’ve all (well, many of us) been hearing about Joe’s plan to go after capital gains and corporate taxes. The proposed doubling of the capital gains will be something to address in more detail later, as that impacts way, way more than those “rich corporations and wealthiest individuals”.
What should we be doing? First, we need to understand the taxation balancing act that is always in play: Tax too much, growth is stifled and even reversed (offshored). Tax too little, and government can’t generate the revenue needed. Tax just right, and growth flourishes, government gets enough money, unemployment drops, investments grow, etc. There is always debate on what is “just right” but I would point out again, from my post recently, that tax revenues have increased EVERY year since at least the 1960’s, except for 1970-1971 and 2009-2010. Yes – tax revenues increased year-on-year through both the Reagan and Trump cuts. Our problem is spending. And on nearly $4T inbound into the treasury this year, Joe is expected to spend (approaching) $8T. Year 1.
Also note: Inflation is starting, as we’ve printed too much money and devalued our dollar. While 2-3% is nominal, some sectors are starting to see over 7% – and climbing. Increasing corporate taxes makes money and jobs flee. All of these add up to bad policy.
So again, what should we be doing?
First – spend appropriately. COVID relief should be just that. Not 4x the size, and definitely not to bail out over 200 union pensions, as this last bill did. Infrastructure should be just that. Not 10x that, including $400B to unionize home health care workers, like the current bill proposes.
Second – create an energy transition plan that isn’t a knee-jerk, job-killing emergency reaction that decimates an industry, and even entire states, in weeks and months. Give the nation a chance to fully recover whole also working on a transparent plan that minimizes domestic harm and doesn’t cut K-12 funding (like the current Federal Leasing cancelations).
Third – don’t change the corporate rates either at all, or as much, and definitely not while we’re recovering. Not an economist in the world thinks this is a good idea as the global recovery is trying to start.
There’s more. But I’ve already bored many of you to tears 😊
