The Biden administration recently released a 182-page budget proposal of $6.9 trillion for federal government spending in the fiscal year of 2024. The White House declared that the plan would reduce the deficit by nearly $3 trillion over the next decade by raising trillions of dollars in taxes on the wealthy and corporations, including by instituting a 25% minimum tax on the top 0.01% wealthiest Americans, while boosting investments in child care, education, housing, and healthcare. The President will call for a 20% tax on the income and unrealized capital gains of households worth more than $100 million; a 5% Medicare surtax on earned and unearned income over $400,000; quadrupling of the 1% excise tax on stock buybacks; and an increase in the top marginal income and corporate tax rates. Moreover, the President wants to end tax subsidies for crypto investors, real estate, and oil industries in the proposed 2024 budget.
This initiative to put this tax increase proposal in the political spotlight is making Democrats nervous ahead of 2024. The problem is that the time is very badly chosen to increase taxes because the economic reality of the situation does not correspond to political expectations. President Biden wants to increase taxes for the sole purpose of scoring political points to strengthen his position for a potential run for next year’s presidential election. As inflation remains stubbornly high and interest rates keep increasing at an exponential rate, consumers will likely save more than spend since goods and services are becoming unaffordable for the ordinary person.
Source: U.S. Bureau of Economic Analysis
Between September 2022 and January 2023, personal saving rates increased from 3% to 4.7%, which resulted in a 56% increase. More importantly, wages have struggled to keep up with inflation.
Source: U.S. Bureau of Economic Analysis
January 2020 and March 2021, wages outpaced inflation. People could spend more because they felt richer since the Federal Reserve injected a lot of cash into the economy through stimulus checks and heavy doses of quantitative easing. Since March 2021, inflation has consistently outpaced wages although wages grew. Thus, people’s purchasing power decreased significantly due to the rise of inflation. Therefore, since the general level price has skyrocketed, consumers are incentivized to save rather than spend.
Biden wants to go after the rich, but his budget proposal will eventually fall on the middle-class and the working-class. First, the wealthy have the resources to avoid paying taxes. They have tax lawyers and accountants who can navigate the IRS tax codes and regulations to find loopholes in order to legally avoid paying taxes. In the worst-case scenario, the wealthy will always put their money into tax-exempt securities, which will allow them to legally not have to pay taxes. Second, imposing taxes on unrealized capital gains is a very bad idea for several reasons: first, it will be an administrative nightmare because of the complex accounting, valuation, and litigation. Second, from a marginal point of view, they included wages and investment income into the tax base, but it will create scenarios where the effective rates are outrageously high on America’s family-owned businesses. Third, the role of inflation will force business owners to pay taxes on imaginary gains.
The fundamental problem of Biden’s budget proposal is that it seeks to tax capital while capital is the engine of the national economy. Capital is what enables the creation of output, innovation, and the expansion of the economy overall. If capital is taxed for political expediency, then the middle-class and the working-class will suffer the most because capital is what enables these two social classes to afford the goods and services put forth on the market.
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