Billionaire Tax is Wrong, Unfair and Counter-Productive
President Biden has just released his proposal for the Federal government’s budget for fiscal year 2023. In spite of an overheated, highly inflationary economy, Biden proposes a budget with a more than $1 trillion deficit and calls for a wealth tax on the very wealthy. That tax is a terrible idea.
It is obvious that the federal government has a severe deficit spending problem. In the last 59 years, the federal budget has had a deficit in 55 of those years. Since there is no program in place to ever pay back the bonds that are sold to finance the deficit, the public debt keeps growing and now exceeds $31.5 trillion.
$1 Trillion in Interest a Year
The annual interest expense is about $400 billion this year. Most of the current debt carries an interest rate of 1% to 1.5%. Once the debt is rolled over at higher interest rates, the annual interest expense will more than double. As more debt is incurred, the interest expense will reach an unsustainable level, approaching $1 trillion annually.
The way to reduce the deficit and hold the line on the public debt is to decrease government spending. The President disagrees. In fact, he wants to spend trillions more on social programs and climate change.
To reduce the deficit, Biden wants to over-tax the wealthy, mostly by taxing them on capital gains that they may or may not actually receive, i.e. realized and unrealized gains. Biden claims that the wealthiest American billionaires paid only 8.2% of their income in taxes. Biden claims “That’s a lower rate than many ordinary Americans pay.”
Asset holders, like farmers, may have to sell part of their assets just to pay capital gains taxes on their land.
That analysis is very misleading. Every definition of income is based on money received during the year. Biden’s definition of income includes the perceived gain in the value of assets of the individual, whether or not that gain has been actually realized.
In other words, if an individual owns real assets like property or financial assets like stocks, those assets usually increase in value every year. Currently, that gain in value is not taxable until it is actually received when the asset is sold. Biden wants to estimate the increase in value annually and tax the holder each year.
That could mean that asset holders, like farmers, may have to sell part of their assets just to pay capital gains taxes on their land. That would be necessary when the farmer’s land value increased, but since none of the land was actually sold — the farmer would have no money to pay the taxes due.
That’s simply wrong and unfair.
The current system means that no taxes are due until the asset is sold and the income is received. That’s the right and the fair way to tax.
Biden’s goal is to have the very wealthy pay more taxes in order to raise total tax revenue. But raising tax rates on the wealthy may result in less tax revenue, not more. That’s because the higher rates would slow economic activity meaning there is less income generated, likely leading to less tax revenue. In other words, 30% of $1,000 is more than 40% of $700.
Current Tax is an Impetus for Investment
In 1996, Congress reduced the capital gains tax rate from 28% to 20%. Capital gains tax revenue increased each year following that rate reduction. The lower tax rate led to more economic growth — and more tax revenue.
Some knowledgeable economists will disagree with that. They will note that during the 1950s, marginal income tax rates for the wealthiest Americans were 70% and for a short time as high as 90%. Yet the economy experienced high growth rates. They say that proves that high tax rates do not slow economic growth.
In the 1950s that was true. Today it is not. That’s because in the 1950s we had a labor-intensive economy, meaning there were factories with thousands of workers on the assembly line and little input from capital. Today our production facilities have thousands of robots on the assembly line with few workers.
Robots are capital goods, meaning the economy needs sufficient capital available to purchase those goods. New capital comes from corporations’ retained earnings but mostly from income earners who pay their taxes, spend to maintain their lifestyle and then invest the remainder of their income. That investment creates new capital.
By raising taxes on the very wealthy, there would be less new capital created. At a time when the public debt is so large, creating as much new capital as possible is critical for economic growth. Biden’s new tax idea would reduce capital formation, slow economic growth, likely reduce tax revenue and would therefore be counter-productive.
Let’s say no to Biden’s billionaire tax.
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So ‘puddin brain’ wants an advance on taxes (capital gains) not due yet? He’s really wants to spend the next generations money now! Does that really surprise anyone?