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The Senate Finance and House Ways and Means Committees are working to raise taxes on American businesses to pay for the gargantuan $3.5 trillion budget reconciliation spending plan. We are getting to the part of the process where policymaking gets down in the weeds. As that occurs, it is crucial not to lose sight of the most important outcome from those tax hikes: they will greatly weaken our economy, which will reduce job creation and wage growth for American families.
With the proliferation of dynamic estimates in recent years, we can put numbers to the economic loss that the tax hikes would inflict. The tax writing committees have not put out enough details to adequately score their coming hikes, but President Biden’s budget serves as a good proxy for where they are likely to go.
- The Tax Foundation scored several potential tax hikes, including a 28% corporate rate, higher taxes on businesses international income, imposing a 15% tax on book income, higher capital gains taxes, and other increases. They found those taxes would reduce the size of the economy by 1.3% over time, reduce wages by 1%, and eliminate 233,000 jobs.
- The Penn Wharton Budget Model estimated the entire Biden FY2022 budget and found similar results as the Tax Foundation. They estimate the economy would be 1.1% smaller in 2051, largely because the higher taxes would discourage savings and investment.
- Moody’s Analytics has a more favorable view of taxing and spending. They find the economy would be 2% larger in 2031 because of the reconciliation bill Congress is currently considering. That largely comes from the extra spending and the analysis is shorter than the others. The tax hikes will undoubtedly weigh on the economy more if the estimate is taken out to later years, as in the Tax Foundation and Penn Wharton models. If Moody’s separated the impact of the tax hikes from the increased spending, that would likely show a negative impact. Moody’s analysis includes the iterative effects of multiple proposals (the American Rescue Plan, the American Jobs Plan, and the American Family Plan). The respective impacts of these plans have to be teased out to find their specific effect on the economy.
Once the committees release legislative text, the Joint Committee on Taxation (JCT) and the Congressional Budget Office (CBO) will dynamically score the bills. That will give us the most up-to-date estimate of the potential tax hikes' impact on the economy. Proposed legislation will also allow other estimators to update their estimates.
There is no doubt that higher taxes harm the economy. The open question is, depending on the policy, how much? The tax hikes Congress is now considering are large and are targeted directly at investment. That will result in a big economic hit when it comes to the size of the economy, jobs, and wages.
Just as important, a point often missed, is that tax increases will lessen the resiliency of our economy when crisises hit, making it more difficult to recover when the next inevitably does come. As we’ve learned over the last 18 months, having a resilient economy is tremendously valuable. The U.S. economy is the envy of the world again as it bounces back strong from COVID-19. Should Congress go through with massive tax hikes, that may not be the case next go around.