Tax Hikes: Bad, But Bearable

With the Senate having passed a budget plan yesterday with only Democratic votes as well as a tie broken by Vice President Harris, it is only a matter of time before President Biden signs the first significant tax hike since the “Fiscal Cliff” tax hike in early 2013. What’s important to keep in mind is that it could have been worse…much, much worse.

President Biden originally set out to raise the top tax rate on regular income to 39.6%. That didn’t happen. Biden wanted to raise the top tax rate on long-term capital gains and dividends to 39.6% (versus a current 20%). That didn’t happen. He wanted to get rid of the step-up basis at death. Nope. He wanted to raise the regular corporate tax rate to 28% (versus the current 21%) and tax “carried interest,” as well. Again, no dice.

Compared to what the President sought, the tax hike we’re soon getting is a shadow of its former self. But that doesn’t mean it’s good for the economy. The three most prominent sources of more government revenue will be a new 15% minimum tax on the book profits of large publicly-traded companies, beefed-up IRS enforcement against the middle class, and a new 1% tax on stock buybacks.

Although these changes are not, all by themselves, going to throw the economy into a recession (monetary policy eventually getting tight should generate a recession all by itself!), that doesn’t mean the tax changes are good ideas.

Take the new 15% minimum tax on companies. Essentially, Congress is outsourcing tax policy to FASB, the Financial Accounting Standards Board, which is a private organization that develops accounting standards. Meanwhile, companies that might be affected by this tax will find ways to avoid it, for example, by reorganizing so tax deductions are taken by more profitable spin-offs that are going to pay taxes above the minimum anyhow.