According to recent press reports, the Biden administration is preparing a $3 trillion spending plan financed by massive tax increases on corporations and the wealthy. If these reports are true, the Biden administration will be repeating the same mistakes the Obama administration made its first year in office, missteps that chilled any hopes of bipartisanship and led to the slowest economic recovery on record.
First, the Obama administration rejected bipartisanship and pushed through a massive (at the time) fiscal stimulus plan without any Republican support, ending the chances for bipartisan cooperation for the rest of the term. The Obama administration then proposed a budget calling for more spending and more than $1 trillion in tax increases on people and corporations. These tax increases called for higher individual tax rates, higher capital gains and dividend taxes, higher corporate taxes, and higher estate taxes.
The Tax Foundation said the consequences of the Obama tax increases “would be slower economic growth, less job creation, and less wage growth.” This is exactly what happened. These massive tax increases chilled any hopes of a strong economic recovery. With $1 trillion of tax increases hanging over it, the economy just limped along, growing at an average rate of only 1.4% the next four years and never reaching 3% growth during the Obama administration.
The Biden administration appears to be following a similar course. It has already jammed a massive stimulus plan through Congress without any Republican support, and it is about to propose trillions of dollars more in spending and tax increases. The tax increases under consideration by the Biden team are right out of the Obama budgets of old. They would appear to focus on higher individual tax rates, higher capital gains and dividend taxes, higher corporate taxes, and higher estate taxes.
Just like the Obama days, we will be told that these tax increases will only hit rich folks and big corporations and that they will have no negative impact on the economy, small businesses, and average taxpayers. But just like the Obama days, we will see that these massive tax increases will curb the economic recovery, slow job creation, and leave more people unemployed.
According to a paper just released by the Congressional Budget Office, The Economic Effects of Financing a Large and Permanent Increase in Government Spending, on March 22, financing a large expansion of government spending with a substantial tax increase would reduce, not increase, economic growth. The CBO paper analyzed a large spending and tax program and found that “after 10 years, the level of GDP is between 3% and 10% lower than it would be without the increase in expenditures and revenue.”
In other words, increasing spending and raising taxes results in lower economic growth, fewer jobs, and lower wages. With recovery from the pandemic finally in sight, the last thing we need right now are massive tax increases.
Bruce Thompson was the assistant secretary of the Treasury for legislative affairs during the Reagan administration and the director of government relations for Merrill Lynch for 22 years.
