BY PAUL H. KUPIEC
Newly-elected administrations try to lay the groundwork for their legacy in the first 100-days in office. During their “honeymoon” period, they introduce landmark legislation and issue executive orders to address existential economic or national security concerns, or carry out the campaign promises that delivered election victory. Based on the actions of its first three months, the legacy of the Biden administration is shaping up to be a slow-growth, hyper-partisan, zero-sum presidency. Never in US history has such a closely contested election with such narrow majorities been followed by such aggressively partisan programs that will diminish the nation’s future economic growth potential — all in order to enact massive transfer payments to the administration’s voter base.
The Biden administration’s first 100 days included actions that will destroy red-state jobs. Executive orders that ended Keystone pipeline construction and new oil and gas drilling on federal land canceled thousands of jobs, primarily in red states. The administration’s push to enact a $15 per hour national minimum wage would force all states to impose blue-state labor costs on their businesses which will damage the competitiveness of low-cost red states.
Other administration priorities in the first 100 days have funneled huge amounts of borrowed federal taxpayer funds to blue states, their government employee unions, and to immigrants illegally flooding through our newly-porous southern border. This expansion of targeted federal entitlement expenditures and additional proposed “green” infrastructure subsidies will require new sources of tax revenue. The problem is that many of the administration’s proposed tax reforms will inflict long-term damage on the economy.
The Biden administration’s plan to increase the corporate tax rates is being sold as a way to fund the expansion of federal government largesse by making large international corporations “pay their fair share.” Democrats argue that corporate taxes are paid exclusively by wealthy corporate shareholders, ignoring economic studies that show these taxes are paid by three separate groups: shareholders — including lots of average families saving for retirement — millions of corporate employees in the form of lower wages and benefits, and every consumer in the form of higher product prices. Economists argue about the exact share paid by each group, but all agree that ordinary citizens pick up a big tab.
Raising the corporate tax rate will have far broader implications than taxing the 55 large profitable corporations that allegedly paid no tax in 2020. According to the United States Census Bureau, in 2017 — the last business census available — there were 943,354 corporations in the US, most of them small businesses. The chart below shows the number of corporations categorized by the number of their employees, as well as the total employment in each of those categories. Notice that there are hundreds of thousands of closely held small- to medium-sized corporations that will be subject to Biden’s “Made in America” corporate tax rate of 28 percent.
Raising the corporate tax rate from 21 to 28 percent will significantly reduce the cheapest source of corporate investment capital — internally generated funds — capital that fuels the growth of many small- and medium-sized corporations.
Because corporate profits are subject to double taxation, the total tax paid on a dollar of corporate revenue distributed in the form of qualified dividends can reach 45 percent under the Biden proposal. Should Congress adopt the president’s full campaign plan to tax dividend income at ordinary income rates for those earning $1 million or more, the total federal tax on $1 of corporate revenue will exceed 59 percent. There is little doubt that the $1 million income threshold would impact the owners of many profitable closely held C-corporations. It is not hard to imagine that such confiscatory tax rates will impact corporate growth.
No doubt these “Robin Hood” policies appeal to Democrat interest groups. What proponents of the “Made in America” tax plan fail to recognize is that these tax policies will do nothing to stimulate economic growth. Indeed, they very likely will erode the productive base of our economy. The size of the “economic pie” that can be consumed by the citizens of a nation almost certainly depends on how the fruits of labor and capital are taxed. These new, higher corporate tax rates are likely to have a chilling effect on corporate entrepreneurs’ zest for investing and growth.