President Biden’s proposed 2025 budget contains massive tax increases to pay for “numerous new and expanded government programs that would make reaching fiscal solvency harder,” notes the Cato Institute’s Adam Michel. Some of the tax rates are so high that they would actually produce less revenue than a slightly lower rate that encourages people to work and invest more — meaning that deficits over the next decade will be much higher than Biden claims:
As written, the budget proposes $4.9 trillion in higher revenue over ten years through costly tax increases on businesses and individuals. The proposed tax increases would raise US tax rates to some of the highest in the developed world and to… higher than any point in US history [as a percentage of the economy]….
The budget includes higher taxes on wage income, higher taxes on investment income, and higher taxes on businesses.
High taxes on wage income reduce the number of hours people work, the incentive to acquire new skills, choice of occupation, and the amount of work effort. The highest income earners are frequently people with unique skills and lots of training, such as doctors, business owners, entrepreneurs, lawyers, and CEOs. Higher taxes on these individual’s wages will translate into strong disincentives against their most productive work….
Higher taxes on investment and business income—corporate income, pass‐through business income, capital gains, and unrealized wealth—directly reduce incentives to invest in and grow the types of businesses that employ millions of Americans and are the envy of the rest of the world. A series of recent papers confirm that the 2017 business tax cuts boosted domestic investment by about 20 percent. Reversing those reforms and adding new tax increases on investment returns will have the opposite effect, depressing the types of activity that lead to higher wages and faster productivity growth. If all of Biden’s tax increases were enacted, Americans would pay income tax rates well‐above the average across the OECD.
The following list includes some of the president’s major tax proposals.
Increase top marginal tax rate to 39.6 percent….the threshold for the top tax bracket is reduced to $400,000 for single filers ($450,000 married). After accounting for state and local income taxes, Americans in many places, including California, Hawaii, New Jersey, New York, and Washington DC, will face top marginal income rates above 50 percent, which is well above plausible revenue‐maximizing levels.
Increase corporate income tax rate to 28 percent. The 2017 tax cuts lowered the corporate income tax rate from 35 percent—the highest rate in the developed world—to 21 percent. After accounting for state corporate income taxes, the United States’ current average corporate tax rate remains higher than the worldwide average. Biden proposes raising the corporate income tax to 28 percent, which would leave the US with the second‐highest corporate tax rate in the OECD, behind Columbia….
Tax capital gains and dividends at top rate.…The budget proposes taxing capital gains at the new top marginal income tax rate of 39.6 percent (plus a higher 5 percent NIIT) for taxpayers whose income exceeds $1 million.
Expand Net Investment Income Tax (NIIT) at 5 percent rate. Obamacare’s NIIT of 3.8 percent applies to most non‐wage passive income (primarily capital gains and other investment income) for taxpayers with income above $200,000 single ($250,000 married). The NIIT was intentionally designed to exempt active business income to spare small and family‐owned businesses from higher taxes. For incomes over $400,000, the budget proposes expanding the NIIT to include more types of income and raises the rate to 5 percent. Combined with taxing capital gains at top income tax rates, the 5 percent NIIT raises the top federal marginal capital gains tax rate to 44.6 percent.
Quadruple stock buyback tax. The Inflation Reduction Act of 2022 implemented a new 1 percent excise tax on the total value of stock repurchases or “stock buybacks.” A stock buyback is when a business repurchases shares to return unused profits to investors. It is similar to an optional one‐time dividend payment. The budget proposes quadrupling the new tax on buybacks to 4 percent, which will lower investors’ after‐tax return on the affected investments and likely induce firms to rely more heavily on dividend payments….
On spending, the budget … proposes numerous new and expanded government programs that would make reaching fiscal solvency harder.
Biden’s proposed increase in the capital gains tax to up to 44.6 percent would result in some people paying more in taxes than they actually made on an investment, after adjusting for inflation — because capital gains taxes don’t take into account inflation in determining whether you had a “gain” when you sold a stock, home, or other asset. (Inflation like the jump in inflation that occurred due to Biden’s policies). So much or all of your “capital gain” when you sell an asset after holding it for ten years may be the result of its price rising due to inflation.
Biden’s sharp tax hike on capital gains would effectively punish people for being thrifty and saving and investing their money. Moreover, increasing capital gains tax rates to the high levels proposed by Biden is so economically harmful that it actually reduces government revenue.
Many so-called “capital gains” are the result of inflation, not increases in real value, and capital gains taxes thus punish thrifty people for inflation. As the Cato Institute’s Chris Edwards points out,
If an individual buys a stock for $10 and sells it years later for $12, part of the $2 in capital gains will be inflation. By taxing inflation, the tax code reduces real returns, and thus suppresses investment, particularly in growth companies. A lower statutory rate partly solves the problem.
Far from being too low, current capital gains taxes may be too high, since they tax some people based on essentially fictitious paper income even when those people have become much poorer rather than richer. A liberal economist and Federal Reserve Board member conceded in 1980 that “most capital gains were not gains of real purchasing power at all, but simply represented the maintenance of principal in an inflationary world.” “Between 1970 and 1980, U.S. stock prices fell by half after being adjusted for inflation. But if you sold stock in 1980, after a decade of getting poorer and poorer you would have had to pay capital gains tax.
Under Biden, some people have ended up paying capital gains tax even when their home value or their company stock rose less than inflation, meaning they got less from selling it than they paid for it, after adjusting for inflation. They got taxed for the privilege of becoming poorer.
Under Biden, the national debt has reached unprecedented levels, of $35 trillion not including off-budget liabilities and underfunding of pensions. That’s about $267,000 per taxpayer.
