Sensible message, not so sound policy: President Biden’s budget came out this week with a sensible message about the need for stronger economic growth and sound fiscal policy.
Unfortunately, the actual policies laid out in the budget would reduce economic growth and create unsound fiscal policy, with no real evidence provided to support claims to the contrary.
Not good to be number one: The budget proposes several new tax increases on high-income individuals and businesses, which in combination with the Build Back Better Act would give the U.S. the highest top tax rates on individual and corporate income in the developed world.
Several questions also remain about the OECD global tax deal’s prospects, implementation, and effectiveness, which could affect the administration's tax plans for U.S. multinational companies doing business abroad.
On the spending side: The budget proposes increased spending for several public infrastructure programs. Our analysis, like that of the Congressional Budget Office, indicates public infrastructure programs paid for with higher income taxes results in reduced economic growth.
A better path forward: Our federal policy experts suggest that policymakers consider the tax policies we recommend in our recent Growth and Opportunity report—policies that boost private sector incentives to work, save, and invest.
2. Proposed Minimum Tax on Billionaire Capital Gains Takes Tax Code in Wrong Direction
Biden's budget: President Biden's FY 2023 budget includes a new tax proposal that would require wealthy households to remit taxes on unrealized capital gains from assets such as stocks, bonds, or privately held companies.
Not in line with international norms: Biden's never-been-tried before approach goes in the opposite direction of international norms. In fact, most OECD countries tax capital gains when they are realized and at lower rates than the U.S., and tax capital income overall at lower average tax rates.
Invest in America? The proposal would place foreign savers at a relative advantage as they would not face the minimum tax. A higher effective tax rate on capital gains could also discourage angel investing, entrepreneurship, and risk-taking.
Costly, complex, and unstable: Biden’s proposal would be administratively costly without serving as a stable source of permanent funding. Lawmakers have much better options, such as progressive consumption taxes, to raise revenue from top earners.
Good intentions, not so good policy: Policymakers understandably want to use whatever tools they have at their disposal to address rising consumer costs, but tax rebates, gas tax holidays, and other temporary tax expedients have the potential to add to existing inflationary pressures while doing relatively little to help those in need.
Inflation and inefficiencies: It isn’t unreasonable for policymakers to prefer these policies to unnecessary one-time government spending, or—worse—to use one-time revenue gains for long-term spending increases. Such policies can have their place, but their ordinary inefficiencies are magnified in a high inflation environment.
What should lawmakers do instead? States should evaluate whether they have the capacity for actual tax reform, not just one-time relief. Most states project sustained revenue growth that could fund real reform or rate reductions. Long-term tax relief also puts more money in taxpayers’ pockets, of course, but with a very different incentive structure.