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Biden's confiscatory tax plans unleash class warfare

Biden's confiscatory tax plans unleash class warfare
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In his latest economic policy proposals, President BidenJoe BidenBiden prepares to confront Putin Ukrainian president thanks G-7 nations for statement of support Biden aims to bolster troubled Turkey ties in first Erdoğan meeting MORE has laid out a wish list of tax increases to help pay for his administration’s proposed massive spending increases. His rhetoric, which accuses “corporate America and the wealthiest 1 percent of Americans” of not paying their “fair share,” is a well-worn page from the class warfare playbook. Unfortunately, it perpetuates many misconceptions about the U.S. tax system and ignores the extreme negative effect that these tax hikes would have on investment, work and wages. 

First, a fundamental misrepresentation in Biden’s argument is the claim that the wealthy are paying an unfairly low share of taxes into the system. This kind of statement simply preys on people who feel like it would be a good idea to soak the rich or who merely think the wealthy are able to avoid taxation, but are unaware of the basic facts.  

In 2018, the latest year for which complete IRS data are available, the top 1 percent of taxpayers earned 21 percent of total (adjusted gross) income in the economy, but they paid over 40 percent of total federal income taxes. The top 10 percent earned 47 percent of income, but paid 71 percent of taxes. Calls to make the individual tax code even more progressive are calls on higher-earning families to bear an even more disproportionate share of the tax burden than they already do, not to merely pay as much as everyone else. 

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Second, by disparately proposing a tax increase here and another there, Biden leaves taxpayers themselves to do the math, but avoids disclosing the total tax burden he is trying to impose.  

For corporations, the assorted Biden tax increases would compound, significantly increasing their effect. In general, publicly traded and other large companies, which are sometimes the most economically efficient manner of doing business, are C corporations subject to two levels of tax.    

Biden would increase the corporate tax rate from 21 percent to 28 percent and the tax rate on dividends and capital gains from 23.8 percent to 43.4 percent. The Tax Cuts and Jobs Act (TCJA) in 2017 brought the corporate income tax rate down from 35 percent to 21 percent, which is about average amongst other advanced economies. But the owners of C corporations are subject to a second level of taxation on dividend distributions or sale of stock, which is now 23.8 percent after taking into account tax increases under President Obama that were left in place by the TCJA.  Even under the TCJA, owners of corporations are subject to a combined income tax rate of 40 percent, contrary to claims that wealthy owners of corporations are now barely taxed.  

Here is how corporate double taxation works. Suppose a company earns $100. The company under the Biden plan would pay $28 in corporate tax, leaving the company $72. But to actually obtain that profit, a shareholder under the Biden plan would have to pay an additional 43.4 percent of that $72 upon taking a dividend or selling the stock, which leaves them with only $41. So their total Federal income tax rate on investment would be nearly 60 percent.  

But there are also multiple levels of state taxes to consider. Consider that in a state like California the corporate tax rate is almost 9 percent and the individual rate is nearly 13 percent for the highest incomes. And those rates in New York City are even higher at 16.49 percent, including city, state and MTA taxes and almost 15 percent for city and state taxes for the highest earners. After taking into account all these taxes in the Big Apple, the investor is left with only 25 percent of the profit with government taking three-quarters. But even those figures don’t take into account the 40 percent Federal estate tax imposed upon death for top earners, along with additional state taxes. Taken together, the Biden proposal would increase the Federal tax rate on corporate shareholders to 76 percent, and a confiscatory 87 percent when taking into account income estate taxes in some parts of the country.  

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The Biden proposal would also impose double corporate tax in situations under current law where that can be avoided such as when a company’s owners reinvest all profits in the business during their lifetimes, instead of taking dividends, with a new level of death taxes on any untaxed appreciation in the value of the corporate stock. 

Third, separate from the question of whether wholesale wealth confiscation constitutes “fair” tax policy, Biden acts as though it will have no negative impacts on the economy. But one does not need to be an economist to recognize that such confiscatory levels of taxation will cause investors to think twice before putting their money at risk. It will have a negative impact on employment, as such high taxation punishes work. And it will have a negative impact on wages as decreased investment leads to lower productivity and harms the competitiveness of American workers.  

Each of these reactions means lost resources for U.S. citizens as a whole. Confiscatory tax policies make citizens worse off overall in the name of redistributing resources from the wealthy to the poor. But they ignore the fact that the taxes are imposed on those responsible for the investment that creates jobs. The new administration and its allies in Congress are trying to use the politics of envy and class warfare to argue that low- and middle-income can get ahead only with massive redistribution by the government, instead of economic growth spurred by a dynamic private economy driven by free choice. 

Joshua Rauh is the Ormond Family professor of Finance at Stanford’s Graduate School of Business and a senior fellow at the Hoover Institution. Follow him on Twitter: @joshrauh

Aharon Friedman is a director and senior tax counsel at the Federal Policy Group and formerly served as senior adviser and senior tax counsel at the Treasury Department and the Committee on Ways & Means. Follow him on Twitter: @76redwhiteblue