Cynicism and Dishonesty in the Current Tax Proposals

September 26, 2021 Updated: September 27, 2021

Commentary

I’ve written for years about Washington’s bipartisan fiscal policy—chronic overspending and a consequent inability to balance the federal budget. Neither party knows how to balance the budget. Today, Democrats are in the spotlight, because they’re the ones proposing new taxes in a totally partisan (that is, with zero Republican support) fashion.

Two of the major claims that Democrats have made in defense of their proposed tax hikes are that they’re designed to make the rich pay their “fair share,” and that the new taxes will cover the costs of the huge spending increases that the Democrats are seeking.

First, on the issue of fairness: A familiar refrain used by President Joe Biden, House Speaker Nancy Pelosi (D-Calif.), Sen. Chuck Schumer (D-N.Y.), Sen. Bernie Sanders (I-Vt.), and others is that the rich must pay their “fair share” of taxes. Fine, but it would help if politicians who invoke that phraseology would specify what a “fair share” is. Currently, the top 1 percent of earners pay more than 40 percent of the federal personal income tax. Should they pay 50 percent? 75 percent? If so, why, and what would make that particular percentage a “fair share”?

Apart from the obnoxious vagueness of the term “fair share,” there are at least three very prominent aspects of the Dems’ tax proposals that present a very bad look for the “social justice” crowd.

First, there’s the economic illusion that raising taxes on corporate profits is an effective way to raise taxes on the rich. From a tax standpoint, corporations actually are little more than unpaid tax collectors. Abundant economic research shows that workers bear the brunt of corporate taxes, which is why, when Congress cut corporate taxes four years ago, the lion’s share of the benefits accrued to U.S. workers as wages and employment received a noticeable boost. Raising corporate taxes costs U.S. workers far more than “the rich.” Is that what social justice warriors mean by “fairness”?

Second, the very politicians chanting the mantra about making the rich pay their “fair share” are trying to carve out some generous tax breaks for upper-income taxpayers. Most infamously, they want to gut, or at least reduce, the $10,000 cap on the federal deduction for SALT—“state and local taxes.” That proposal clearly is a tax break skewed toward richer Americans, since taxpayers of more modest means don’t pay anywhere near $10,000 in income taxes to state and local governments, nor do they live in super-expensive houses subject to five-figure property taxes.

According to the Brookings Institution and the Tax Policy Center, 57 percent of revenues that would be lost to the federal government by repealing the cap on the federal SALT deduction would go to the top 1 percent of filers—an average tax cut exceeding $33,000. Another provision would give households earning up to $800,000 per year $8,000 to buy electric vehicles. All the talk of making the rich pay their fair share is nothing more than hollow sloganeering.

Third, according to a Heritage Foundation study, Biden has flat-out lied every time he has declared that he wouldn’t increase taxes on taxpayers with annual income under $400,000. In actuality, under his tax proposals, the Joint Committee on Taxation says that taxes will go up for families earning as little as $50,000 per year. No wonder people are cynical about politics!

Now, let’s see if the numbers add up. A word of caution: It’s virtually impossible to predict how much revenue a change in tax laws will generate, because it’s impossible to predict how taxpayers will alter their behavior to reduce their tax liability. Economists can only offer guesstimates.

That being said, media reports on the tax proposals have been largely unhelpful. Many have simply regurgitated Democratic talking points. Indeed, some of the reports have been real head-scratchers, such as the Politico report that concluded that “$2 trillion in tax increases … give Democrats an entirely plausible plan to completely pay for $3.5 trillion in new spending.” Huh? That must be new math, because my calculator doesn’t show any way for $2 trillion in revenue to cover $3.5 trillion in spending.

However, it isn’t just reporters making that reckless claim. Biden boldly proclaimed that the new taxes would fund more than $4 trillion of new spending.

Let’s look first at the spending side of the budget equation. How much new spending are Democrats aiming for this fall? They’ve settled on a $1.2 trillion spending plan for infrastructure. That total is spread over five years and includes $550 billion of new spending beyond ongoing projects, or $110 billion per year in new spending. They’ve also proposed a $3.5 trillion plan comprised of multiple social spending and climate change projects. That’s a 10-year plan, or $350 billion of new spending per year.

We should note that it can be just as difficult to predict what a federal program will cost as it is to predict how much revenue will result from changes in the tax code. Most government programs end up costing more than originally stated (remember FDR’s promise that Social Security would never cost American workers more than $30 per year?).

Some analysts calculate that the actual price tag of the ostensible $3.5 trillion spending package could exceed $5 trillion—that is, more than $500 billion per year. But for now, let’s take the given figure at face value. Thus, adding $110 billion additional annual infrastructure spending to $350 billion “other” additional annual spending, we arrive at a total of $460 billion of annual new spending.

Now, the revenue side of the budget: To pay for an additional $460 billion per year of new spending, Democrats have proposed several dozen changes to the tax code, both on corporate and personal income. The official revenue guestimate is, according to Yahoo! reporter Denitsa Tsekova (one of the few journalists who seems to have done her homework on this—hats off to her): “Overall, the House Democrats tax plan is estimated to raise $2.2 trillion over a decade, with $1 trillion coming from tax hikes on high-income individuals, $900 billion from corporate and international tax reform, and additional revenue from increased tax compliance.”

You can do the math. A total of $2.2 trillion divided by 10 means that the Democrats expect to raise $220 billion per year with which to fund $460 billion per year of new spending. And that’s even before we factor in the possibility of scaling back the SALT cap, electric vehicle tax breaks, and other factors.

According to the Joint Committee on Taxation, “restoring the full SALT deduction would cost the U.S. Treasury $88.7 billion in lost revenue for 2021 alone,” Bloomberg reported. That would lower the expected additional revenue to $131.3 billion from $220 billion to fund $460 billion of new spending.

Bottom line: the numbers don’t add up. In fact, new tax revenues may fund way less than half of the hoped-for new spending. The claim that new taxes will cover new spending simply isn’t true.

Also, let’s not forget that the federal budget is already hemorrhaging serious red ink, even without adding new spending. Annual federal deficits were $665 billion in FY 2017, $779 billion in 2018, and $983 billion in 2019, before exploding to more than $3 trillion in FY 2020 due to COVID-19. The deficit is projected to be approximately another $3 trillion for FY 2021, which ends on Sept. 30.

Setting aside the enormous fiscal response to the pandemic, we would anticipate the Treasury Department running approximately a one-trillion-dollar deficit in FY 2022 even without any new spending. The Democratic tax/spend proposals would only swell that deficit. No wonder Washington—and Democrats in particular—are sweating about the debt ceiling.

There is, of course, an obvious way for Democrats to lessen the damage to our already broken budget process: Don’t pass the $3.5 trillion wish list of progressive fantasies and don’t negate whatever tax hikes are enacted with special handouts to the rich. We can always hope, can’t we?

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Mark Hendrickson
contributor
Mark Hendrickson is an economist who retired from the faculty of Grove City College in Pennsylvania, where he remains fellow for economic and social policy at the Institute for Faith and Freedom. He is the author of several books on topics as varied as American economic history, anonymous characters in the Bible, the wealth inequality issue, and climate change, among others.