The President continues to insist on higher taxes as part of any budget deal. Even if the proposal is to raise taxes sometime in the future, investors, entrepreneurs, businesses and job creators of all types are forward looking and they will shrink at the prospect of higher taxes. Indeed, the prospect of higher taxes, which has only increased under this President’s tenure, likely explains in large measure why businesses have thus far been so reluctant to increase hiring.
The President has talked mainly of two areas where taxes should be increased, each with considerable downsides:
1) Raise taxes on the rich.
a. The U.S. already has relatively high personal income taxes, even higher than the OECD average, which is comprised of mostly high-taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. European countries.
b. The rich already pay an extremely high share of those taxes: the top 10% pay about 70% of personal income taxes. Accordingly, the OECD finds this represents the most progressive income tax system in the industrialized world.
c. The extreme progressivity of the U.S. income tax system bears directly on volatility in revenues, and explains in large measure the collapse of revenues following the 2008 financial crisis (see the figure below, showing personal income tax revenue rising and falling with the economy). This is because high incomes are relatively volatile, being disproportionately comprised of volatile business and investment income.
2) Close “loop holes,” particularly corporate loop holes.
a. Loop holes, or tax expenditures, are problematic for sure, mainly because they complicate the code and treat special interests specially. However, the vast majority of tax expenditures result from the personal income tax code, rather than the corporate code. This year corporate tax expenditures are expected to cost the Treasury about $102 billion, whereas individual tax expenditures, such as the exclusion for health insurance and the mortgage interest deduction, will cost about $900 billion.
b. Many of these corporate tax expenditures were put in place rather recently, at this President’s urging, to support such initiatives as renewable energy and job creation. Tim Carney says it best: “You can’t really fight against the special interests while also promoting government intervention in the economy.”
c. Closing corporate loop holes without reducing corporate rates amounts to a tax increase, and corporate tax rates in the U.S. are already among the highest in the world. A tax increase at this point will only accelerate the movement of U.S. business activity abroad.
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