To the extent that anyone believes “Sleepy Joe” is concocting policy for his campaign, someone needs to wake him up. Whoever it is that is actually making the policy proposals has put themselves into a difficult corner, one that will wreak havoc on the economy.
Joe Biden seems to want to raise the capital gains tax to 40%. It’s a bad idea, but not too bad. He also wants to increase the corporate income tax to 28%. Another bad idea, but not too bad.
It’s the combination of the two that is so terrible.
The initial bad idea is that the income from capital should be taxed the same as that from labor. We like people investing because that’s what drives future economic growth. We all desire that our children be richer than we are, so we’re just fine, or at least should be, with the people making them richer being lightly taxed. It’s not consumer demand that drives growth. That’s only true in the short term. Investment drives growth over the long term. This is why optimal tax theory actually insists that capital incomes, profits and the like, shouldn’t be taxed at all. Tax them when they spend it, not when they earn it.
That’s a hard political sell, that the plutocrats don’t pay tax, so, obviously, we do tax it all but at lower rates.
The corporate income tax is just a way of taxing those same rich people. A company is just a group of people, like a partnership or a biker gang — often enough closer to the latter. Whatever tax we charge there is obviously paid by the people, not the group. So, tax corporate profits, and we’re taxing the people who own the profits, the stockholders. Again, theory says we shouldn’t tax them, politics says that we will, and while 40% is a too-high rate, it can be lived with.
It’s the combination of the two that really kills economic growth. The value of an investment is the post-tax income to be gained from it. And if we’re to tax it at 40% at the corporate level, then 40% again at the individual level, then we’re taxing at (not quite because of the math) something at about 80%, which is really going to encourage people to invest, isn’t it? This becomes even clearer if that other idea of raising dividend taxes to the same level as the individual income tax gets added as well.
The problem here is obvious enough. There are all these seemingly bright ideas floating around the left-hand side of the aisle. Some to many of them are in conflict with each other, or, when added together, lead to the above sort of economic disaster. This means that someone, somewhere, needs to be awake and sorting through them rather than just adding whatever sounds good to the pot, this also being something that clearly isn’t happening yet.
Perhaps Biden and his economic advisers should wake up, smell the coffee, and get to work sorting out the good policies from the bad.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.