Every four years a Democrat runs for president on a platform that includes higher taxes for the wealthy. And every four years a group of people predicts that the sky will fall if those plans are implemented. Yet every time their plans have been implemented, the sky hasn’t fallen—if anything, economic growth and business investment have been stronger under Democratic than Republican presidents.
Joe Biden’s proposals to raise taxes on households making more than $400,000 annually, and on corporations, are broadly consistent with the tax systems under the successful economies of Presidents Clinton and Obama. The Biden plan also includes a few innovations that would improve on its predecessors. It would devote revenue to an ambitious set of proposals to expand economic growth and ensure it is shared more broadly.
Start with the context. Last year when the economy was near full employment, the low federal tax rates set by the 2017 Tax Cuts and Jobs Act limited revenue to 16% of gross domestic product. That’s the lowest revenue share in half a century, with the exception of recessions and the following years, and it is well below any year under President Reagan. The Biden tax plan would raise revenue to 19% of GDP by the end of his first term, in part by returning the top individual rate to 39.6% and undoing half of the 2017 corporate rate reduction. The revenue share of the economy would remain below the average during Mr. Clinton’s second term, a period of historically fast job growth. It would also be less than the 21% of GDP that the bipartisan Bowles-Simpson fiscal commission proposed in 2010.
So how might the Biden tax plan affect economic growth, when considered in isolation? According to two leading models, the answer is very little. One model is the Penn-Wharton Budget Model run by Kent Smetters, an expert on dynamic scoring who served in the Treasury Department during the George W. Bush administration, and the other is by researchers at the free-market American Enterprise Institute.
The Penn model found that the Biden tax plan would result in higher wages with effectively no impact on growth. The AEI model found that the plan would have a negligible impact on growth, reducing the average annual GDP level by 0.06% over the coming decade, increasing the GDP level by 0.07% in the following decade, and reducing it by 0.2% in the long run.
How could a plan that raises revenue have so little impact on growth? The Biden plan would only partly repeal the Tax Cuts and Jobs Act, which also had very little impact on economic growth. The economy grew at a 2.4% annual rate in the eight quarters before the 2017 act passed, and at a 2.4% annual rate in the eight quarters after it passed—far short of the promised 3%. Most nonpartisan estimates of the 2017 law’s impact—including by the Congressional Budget Office, accounting firms and banks such as EY and
and academic economists—have found that it would add less than 0.1% to the annual growth rate over the next decade.
The Biden plan also includes smart provisions that would improve the tax code and economic growth. It addresses the shortcomings of the Global Intangible Low-Taxed Income, or Gilti, a new category introduced under the Tax Cuts and Jobs Act to close a loophole that had allowed companies to reduce their tax bills by shifting production or profits overseas.
Mr. Biden would also repeal the step-up-basis for assets at death, in a manner similar to a Bush administration proposal. That would increase the pace of exchange for all sorts of assets, and allow them to be taxed more efficiently. The Biden plan would also increase enforcement and close loopholes across the tax code, which would increase the incentive for productive innovation instead of tax avoidance.
A President Biden would likely refine his proposals in office. I would like to see him do more to encourage investment by expanding and extending business expensing and further limiting the deductibility of interest. And though payroll taxes on high earners must be raised to shore up Social Security, I would limit the increase to about 5% of income, instead of the 12.4% Mr. Biden proposes.
The Biden plan as a whole would boost the economy, as near-term stimulus massively outweighs the immediate tax increases in both quantity and bang-for-buck. Goldman Sachs found that the plan’s robust fiscal stimulus would add nearly 1 percentage point to the annual growth rate during a first Biden term.
Over the longer run, the proposed tax increases would help pay for important measures to boost economic growth and ensure that it is shared more broadly. An allowance of at least $3,000 a child is a step that, if made permanent, would reduce child poverty and increase economic mobility. Expanded child care, a critical need exposed by the pandemic, would increase the labor supply. And investments in infrastructure and clean energy would dial up productivity growth. The three other estimates I am aware of for the complete Biden program, from the Penn-Wharton Budget Model, Oxford Economics and Moody’s Economy.com, also predict that it would add to overall economic growth.
Households earning more than $400,000 would have to pay somewhat more under the Biden plan—a reasonable price for policies that would ensure economic growth is more sustainable and shared and ultimately benefit all of us.
Mr. Furman, a professor of practice at Harvard, was chairman of the White House Council of Economic Advisers, 2013-17.
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