President Biden has proposed a back-to-the-future tax plan. When President Trump took office, the U.S. had the highest corporate tax rate in the developed world and had experienced a decade of slow growth, low investment and stagnant employment and real wages. The Obama economy was especially toxic for low-earning and less-educated groups. The assault on business was so widespread that capital’s contribution to economic growth was lower during the Obama expansion than it had been during any other period of growth since World War II.
The academic literature on corporate taxation pointed to the problem. High corporate taxes, a regulatory assault and social programs that discourage work and advancement led many U.S. multinational companies to locate their activity and profits overseas. This reduced or eliminated their tax in the U.S. while also reducing their demand for American labor. Wages dropped and tax revenue dropped, a double hit.
The idea of the 2017 Tax Cuts and Jobs Act was to make America an attractive location for capital formation again, and to drive wages up by increasing productivity. Mr. Trump’s Council of Economic Advisers estimated that wages for a typical family would grow about $4,000 over the first three to five years. Though the Obama administration proposed a corporate tax cut in 2015 for the same reasons, opponents of the bill ridiculed the Trump team’s numbers.
The economic data vindicated Mr. Trump. Actual gross domestic product by the end of 2019 was about $300 billion higher than the Congressional Budget Office had projected in July 2017. Business investment was about $100 billion higher and 2.8 million more workers were employed. U.S. firms repatriated $1.4 trillion in cash that was previously stuck overseas. And in the first two years after the tax cuts were passed, real median household income increased $4,900. Employment surged, especially among the long-term unemployed, the poor and minorities. Wealth for the bottom 50% of households advanced three times as fast as for the top 1%.
The new policy was hardly radical. After the tax cut, the combined U.S. federal and state rate for corporate income was 25.77%, according to the nonpartisan Tax Foundation. That put the U.S. above the average for Organization for Economic Cooperation and Development countries, which is now 23.4%. And even the static revenue cost of the plan supplied by the Joint Committee on Taxation was small, a bit more than $300 billion over 10 years, because tax-base broadening accompanied tax-rate reduction. Perhaps never in economic history has so much been accomplished at so little cost.
Despite that record, the Biden administration’s “infrastructure” bill would reverse many of the policies that worked so well. Mr. Biden proposes to make the U.S. corporate tax rate among the highest in the developed world again—28%. This looks like a modest increase compared with the 2016 rate of 35%, but it isn’t. The base broadeners that financed the rate reduction in 2017 aren’t being reversed; they’re being enhanced. The static revenue gain of more than $1.75 trillion means that the revenue increase is more than five times the size of the cut in 2017. So Mr. Biden is proposing to take the highest tax in the developed word from 2016 and lift it to the heavens.
Why raise taxes now, in a mislabeled “infrastructure” bill? Democrats have never cared about paying for the trillions in pandemic-relief spending. Their modern monetary theorists are refreshingly honest about why: Taxes aren’t necessary to finance spending when government can print money. Centrist Democrats repeated only weeks ago that interest rates are low, so debt burdens need not concern us.
Despite perennial progressive rhetoric about making rich corporations “pay their fair share,” every cent of corporate tax comes from higher prices, lower wages or lower payments to investors. This is accounting fact, not theory. And the evidence suggests that the wage channel is among the most important.
Mr. Biden has suggested he knows that Congress is going to change his bill. Let us pray that it does. This week Senate Democrats sketched a vision for a bill that seems far more flexible than the Biden plan. But even that goes too far.
There has been bipartisan agreement for decades that user fees—and indirect user fees such as gasoline taxes—should cover the cost of infrastructure investments, not tax hikes. Even
was willing to increase the gas tax, but that won’t raise much revenue if everyone is in an electric car. Real-time electronic tolling makes user fees easy to implement. That would reduce congestion, improve the environment and raise plenty of revenue.
Finally, the bill requires so much financing because of provisions on clean-energy innovation. The plan would spend hundreds of billions on preferred green technologies like wind and electric cars, while ignoring nuclear power, natural gas and behavioral adjustments like zoning reforms that let people live closer to their jobs. Green central planning didn’t work for the Bush and Obama administrations, and it won’t work this time either.
If the Biden administration is serious about phasing out fossil fuels, it should pass a carbon tax to raise the price of using them. That would make emissions more expensive on a cost-efficient and scientific basis. It would also stimulate innovation, which unlike the bill’s pie-in-the-sky plans might actually reduce carbon emissions.
A big tax hike, a regulatory onslaught and subsidized pet green projects would lead quickly back to Obama-era sclerosis. American workers will suffer.
Mr. Hassett is vice president of the Lindsey Group and a distinguished visiting fellow at the Hoover Institution. He served as chairman of the President’s Council of Economic Advisers, 2017-19.
An earlier version misstated the federal corporate tax’s top rate.
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