Biden Still Doesn’t Get It on Jobs, Business Growth, and Tax Impacts
According to the U.S. Bureau of Labor Statistics (BLS), the U.S. economy added 235,000 jobs last month. This figure was about one-third of what economists had expected and it was far less than the more than 1 million jobs added in July.
President Biden reacted to this by emphasizing the need for massive increases in government spending and the need for higher taxes on the highest income earners.
The poor performance in the job market was mostly due to the increase in COVID-19 infections and from the continued payment of extra benefits to those currently unemployed.
The economy saw a strong growth rate of 6.5% in the first half of this year.
While July was a strong growth month, it appears growth slowed in August.
Future growth will depend on virus containment and eliminating the incentives for individuals to remain unemployed.
The unemployment rate did fall to 5.2%.
Considering the unemployment rate was 14.7% in April 2020, the drop to 5.2% in 16 months is remarkable.
It also demonstrates that even with the poor August performance, fundamentals in the economy are very strong.
That means the economy does not need massive increases in government spending.
And the economy certainly does not need to have high tax rates on those who make the largest contributions to the economy.
While Biden did note that 55 of the largest corporations paid no taxes last year, the remaining nearly 6000 public traded companies paid hundreds of billions.
Even the corporations that paid no income tax, mostly because of tax credits and tax avoidance schemes, did pay billions in Social Security and Medicare taxes for their employees.
And their employees paid billions in personal income tax.
The president said to fix this long term, taxes for corporations must increase and tax loopholes eliminated. He also wants to raise tax rates for the highest income earners, who he says are not paying their fair share.
“They can still have their three houses,” he said.
Eliminating loopholes and tax credits makes sense.
But overtaxing the highest income earners is not about the number of houses they own.
It’s about creating new capital which is sorely needed for a capital intensive economy to grow. Biden wants the highest income earners to pay their fair share.
How much do they pay?
In 2018, after the most recent tax cut was implemented, the top 1% of income earners paid 40% of all income taxes collected by the federal government. The top 25% of income earners paid 87% of taxes, while the bottom 50% of income earners paid less than 3%.
The wealthy are already paying more than their fair share in income taxes.
Raising the corporate tax rate from the current 21% will be counterproductive.
It will result in higher prices for consumers since corporations will raise prices to maintain profit margins.
Worse yet, it will reduce capital formation by reducing retained earnings.
Both higher prices and less capital will slow economic growth.
If Biden really wanted to help the middle class, he would reduce Social Security and Medicare taxes. Nearly all workers pay 12.4% of their wages to Social Security (they pay half and their employer pays half for them.)
Additionally, the Medicare tax is 2.9% of wages, meaning nearly all workers pay a total of 15.3% of their wages in those payroll taxes.
Of course, it is nearly impossible to cut those tax rates since both the Social Security System and Medicare will be bankrupt within the next decade.
Biden wants to spend an additional nearly $7 trillion on infrastructure and his “Build Back Better” plan. Since economic growth is strong, this spending will lead to excess demand that will make our inflation problem much worse.
The 46th president’s best position now is to do nothing regarding government spending and taxes. The current budget deficit will increase the public debt to over $30 trillion, which will cause problems for future generations as the interest expense will approach one trillion dollars annually.
Biden says he will raise tax rates only for individuals earning in excess of $400,000 annually. That’s only about 1.5 % of the population and those people are already overtaxed. Eventually, if he carries out his spending plans, taxes will have to be increased for nearly all Americans.
While the jobs numbers for August were a disappointment, that’s no reason to have the government increase its taxing and spending plans.
Controlling the virus and eliminating incentives to not work, will increase future jobs numbers and continue to grow the economy.
At this point, we should simply, stay the course with Fiscal Policy and not increase government spending or taxes.