WASHINGTON (Pakistan Point News / Sputnik - 01st May, 2021) President Joe Biden's plan to heavily tax millionaires and billionaires to fund growth in the United States could spark a recession as the wealthy might not invest in the economy like before and find ways to pass the higher burden to ordinary citizens, analysts told Sputnik.
In one of the most ambitious development plans laid out by a US president since Franklin Roosevelt, Biden aims to raise $1.8 trillion over the next decade to fund childcare, universal pre-kindergarten education and paid leave for workers.
Biden has said his key strategy is to increase the capital gains tax to 39.6 percent on individuals earning more than $1 million a year from the current rate of 20 percent. Capital gains are proceeds obtained from selling any product - including real estate, vehicles or art - though they typically refer to money made from investing or trading in stocks and other financial instruments.
Biden also said he seeks to raise the marginal tax income rate to 39.5 percent, from 37 percent now, on households making $400,000 or more per year although some administration officials have hinted the tax hike may affect anyone who earns more than $200,000 per year.
In addition, Biden ordered the US Treasury Department to work on a plan to increase the US corporate tax rate to 28 percent from 21 percent to fund a separate $2.3 trillion infrastructure program.
"The way he's doing it, it won't increase the tax revenue," Lance Roberts, chief investment strategist at the Houston based financial firm RIA Advisors, said. "Biden will actually wind up affecting the economy; hurting the average American worker; not really raising more functional revenue at all; and get us deeper into debt in the next five to ten years."
TAX HIKES TRICKLE DOWN, TAX CUTS DO NOT
Roberts said it is a mistake for the Biden administration to assume that it can increase taxes for those in the higher bracket without affecting those in the lower tax brackets.
"That's because tax hikes trickle down; tax cuts don't," Roberts said. "Ninety percent of all the financial assets in the market are owned by 10 percent of the people. They are the ones that create most of the jobs in the country, they are your business owners, your executives etc. If you're going to raise capital gains tax on them, they are going to pass that cost on to the rest of the economy through higher prices for their products and services. So, the people who end up paying the most amount of taxes - including their own personal income tax and now the passed-on higher tax burden of the rich - are those at the bottom of the income chain."
But when business owners get tax breaks - such as the 14-percent cut in corporate tax by Biden's predecessor Donald Trump in 2017 - the opposite often happens.
"The net impact of Trump's tax cuts was to incentivize companies to buy back their own stock; that's why you had record stock buybacks during his term," said Roberts.
Steven Keller, investment manager at New York-based Wexler Capital, said Biden risks triggering a major selloff on the stock market by the 10 percent of investors who own 90 percent of the capital if his administration persists on implementing the proposed measures.
"You'll devastate the balance 90 percent of the investors who rely on the market for their 401K retirement plan and probably put the economy back into recession," Keller said.
A recession is defined as two straight quarters of economic slowdown. The United States has barely recovered from the coronavirus-induced recession that occurred between the first and second quarters of 2020, with the pandemic still weighing on the economy.
BIDEN HAS ENFORCERS, THE WEALTHY HAVE LAWYERS
Both Keller and Roberts say Biden's plan to spend tens of billions of additional Dollars each year to equip the Internal Revenue Service with more resources to pursue tax evaders might not get desired results, especially if the rich were also paying for the best legal help to avoid getting ensnared by the tax man.
Tax experts say most owed taxes are paid within a couple of years after an audit, while the rest trickle in slowly and sometimes are never collected.
Roberts said one should bear in mind the wealthy have very good tax attorneys and the money is fungible.
"Money can be moved into other assets that are not taxable. It can be moved to offshore tax havens. That's why Amazon, eBay and IBM pay no taxes at all," Roberts said.
Biden proposed last month a global minimum for corporate taxes and vowed to crack down on large US companies that have long employed complex maneuvers to reduce or eliminate their tax bills by shifting income on paper between countries.
For instance, Apple, the iconic Iphone maker, parks its profits ihe island of Jersey, which has zero corporate tax and is located in the English Channel, between England and France.
More than a thousand other big, mostly US corporations - including eBay, Google, Apple, Facebook, PayPal, microsoft, Yahoo, AOL, Twitter, Intel. Pfizer and Johnson & Johnson - have their tax base in Ireland, which has a corporate tax of just 12.5 percent compared to the US rate of 21 percent.
For an idea of the kind of complication Biden could run into, Roberts cited former President Bill Clinton's move in the 1990s to try and limit non-taxable executive compensation to $1 million.
"When [former President Bill] Clinton did that, the corporations got together with the Wall Street banks and said 'Great, let's do stock option plans,'" Roberts said. "Similarly, if you decide to start raising taxes on me for making more than $400,000, I'll say 'no problem.' My declared income from next year will be $399,999.99. I will find other ways to compensate myself by getting my company to buy my car, my house and pay for my business trip with my entire family tagging along, and we won't even call that a vacation."
Few analysts believe Biden's multi-trillion Dollar development blueprint for the United States will find its way through Congress without major downsizing, due to his Democrat party's razor-thin majority of one vote in the Senate and the rival Republicans intent to block the plan in its original form. Just in March, Congress approved Biden's $1.9 trillion COVID-19 relief bill, but meanwhile he proposed his $2.3 trillion infrastructure plan and additional spending that amounts to $6 trillion.
Republicans have said such level of spending is exceedingly wasteful and will certainly bring in hyperinflation as well as capital flight that may decimate the economy.
Aside from Republicans, the US Chamber of Commerce, which represents more than 3 million business owners in the country, has vowed to stop Biden's proposed tax hikes, with its Chief Executive Suzanne Clark calling them "outrageous" and wanting to punish people for investing in the economy.
MASSIVE US DEFICITS LIKELY FROM BIDEN'S PLAN
Keller said even if the president got his wish of hiking corporate taxes to 28 percent and almost doubling capital gains taxes to 40 percent, "the amount of tax revenue that will be generated over the next 15 years won't even pay for the $6 trillion in COVID-19 spending that's already done."
"Also Biden now has plans to make some things like child care tax credits permanent," Keller said. "So, we're going to continue to run massive deficits because the tax increases won't generate enough revenue."
The US budget deficit rose to $1.71 trillion in the first six months of fiscal 2021, with a record monthly expansion of $660 billion in March, the Treasury Department said.
The government's tax total revenue for fiscal year 2021 is, meanwhile, is estimated to be at just under $3.9 trillion.
CONSUMPTION TAX AS A POSSIBLE ALTERNATIVE
The bipartisan Congressional Budget Office estimates that increasing the Internal Revenue Service's funding for audits would increase revenues by between $61 billion to $103 billion over ten years, depending on how much the agency's budget is increased.
That is far more conservative than the $1.15 trillion in revenue that former Treasury Secretary Larry Summers says can be obtained if the agency's budget is boosted by $100 billion over the next ten years.
Summer said he thinks more than 70 percent of the gross he has estimated - some $715 billion - would come from additional audits. That is one of the arguments that has enticed Biden into thinking that the way to fund US growth was to heavily tax its super wealthy.
Roberts said he thinks a better idea would if Biden implements a consumption tax.
"If he's smart, he'll do that. That will fix the problem because the rich buy jets, Porsches and Bugattis, and the poor buy Mazdas and Volkswagens. A consumption tax is relevant to all income levels. That's how you raise tax revenue."
