Biden Can’t Tax the Rich

By Kevin D. Williamson

Thursday, October 22, 2020

 

Joe Biden’s tax plan is based on a deathless myth: that taxes are actually paid in economic terms by those upon whom they legally fall. The obviousness of this nonsense is clear enough if you put the proposition into plain English: “Don’t you worry, now, we’re not going to raise taxes on you, Bubba — we’re just going to raise taxes on your employer, your customers, your vendors and business partners, the people who make and sell the things you buy and use, your bank, your Internet provider, the companies that build houses and commercial buildings, your landlord, gasoline distributors, all the companies your retirement account is invested in — oh, you won’t be affected at all!”

 

Biden’s tax plan is a lot like the Republicans’ health-care plan: He mainly is interested in undoing what was done under the last president, in this case partially repealing the 2017 tax bill put together by Paul Ryan, which, for some reason, we call the “Trump tax cuts.” But tax increases are generally unpopular, so Biden promises to raise taxes only on a despised and resented minority: People who make more money than most of the people he is trying to persuade to vote for him. In this case, that means a promise to raise taxes only on households earning $400,000 a year or more, roughly the top 2 percent of earners. Biden would also substantially raise business taxes, and the majority of his $3 trillion or so in new taxes over ten years would fall directly on business owners — and indirectly on their employees, vendors, and customers.

 

Who actually ends up paying business taxes is a hot topic in economics, and it gets pretty complicated pretty quickly. To take one example, most economists agree that at least some of the payroll taxes that are in theory paid by employers end up being paid by employees, whose wages are reduced in order to offset the expense of the tax. Inevitably, that kind of cost-shifting falls most heavily upon low-wage employees, who, by definition, have relatively little power in the market. (That’s why they don’t get paid very much.) That’s not the case for, say, LeBron James or a top-flight AI nerd coming out of Stanford.

 

Just as individual employees may have more or less ability to resist efforts at passing tax costs along to them, so do companies. Many people assume that businesses simply raise prices to pass tax costs along to consumers, but that’s not really true: Businesses such as Walmart and McDonald’s have very price-sensitive customers, and if they raise their prices those customers will go somewhere else. Rolex and Tesla probably can raise their prices pretty easily, as can utility companies and, in many American cities and suburbs, landlords. Starbucks and Costco can’t.

 

Consumers are not the only parties to whom businesses can pass on their costs. Many businesses do that with their employees, as noted above, but they also do it with other businesses. Walmart may not be able to increase what it charges consumers for laundry detergent and flip-flops, but it can probably decrease what it pays its vendors for laundry detergent and flip-flops, or alter the terms of payment in ways that suit its interests. Because so many companies rely on Walmart for a very large share of their sales, the big retailer has shown itself willing and able to slap around some blue-chip corporate household names. The same is true of Amazon. And when those firms end up having to pay Walmart’s taxes, they do the same thing Walmart does — they look for someone to whom they can pass along the expense: workers, customers, and other businesses. And so it goes, on and on.

 

Of course it matters — a great deal — to those businesses and high-income individual taxpayers what their tax rate is, and where those taxes formally fall. Though they may try to pass on the cost, they still have to write that check, and they still pay at least some of it — and cost-shifting is not without transaction costs. But ordinary, middle- and lower-income people will pay for Joe Biden’s tax increases, too. It just won’t be obvious to them. They’ll find it harder to get a raise or overtime, harder to meet their regular expenses, harder to get a better job, harder to make a sale or bring on a new client, harder to pay for college.

 

The guys on the yachts are going to be smoking the same $60 cigars they’ve always smoked and still drinking their Louis XIII.

 

Beyond the issue of cost-shifting, there is the fact that very high-income people generally do not earn much of their money in salary: They earn much of their money in performance-related pay. Biden intends to raise taxes on that, too, but there’s a problem: That kind of income can fluctuate significantly from year to year. For example, the Financial Times reports that many big U.S. banks — including Citi, JPMorgan, and Bank of America — will be reducing their bonuses this year. You may not be inclined to shed a tear for the pinstripes mafia, but less income for bankers means less tax revenue, especially in places such as New York City and New York State, which rely on a small percentage of their taxpayers — a lot of high-earning guys in finance — for most of their tax revenue. Biden’s attempts to shift the tax burden even more heavily onto a smaller group of taxpayers will replicate New York’s error at the national level.

 

People in local governments that depend heavily upon sales-tax revenue are familiar with this problem: At the very moment when government probably needs more money for emergency services or economic stimulus — say, a serious recession or a crippling coronavirus pandemic or both — tax revenue is plunging because of disruptions to business activity. The federal government does not worry about that very much right now because Washington can borrow money so cheaply — but that party won’t last forever. By trying effectively to shrink the tax base, Biden’s plan would make U.S. public finances marginally less stable in the long run. Of course, Biden will be 78 on the day the next president is sworn in — he’s not buying green bananas, much less worrying about interest rates in 2032.

 

The problem for progressives is that it is not easy to build a Western European- or Scandinavian-style welfare state without a Western European- or Scandinavian-style tax regime, under which middle-income people pay much more in taxes than they would in the United States. One of the lessons of the Scandinavian success stories is that if you are interested in redistribution, it often is far more effective to do it on the spending side than on the taxing side. (Unfortunately, that depends in no small part upon the Scandinavian capacity for the effective and relatively efficient delivery of services, something for which U.S. public agencies show relatively little ability.) Imagine a situation in which you have an absolutely flat income tax and every household receives a bundle of services or benefits roughly equal in absolute dollar terms: The billionaire and the barista may both receive exactly the same $2,500 a month in services and benefits, but it means a hell of a lot more to the barista. I am not much of an enthusiast for universal basic incomes, but that is one of the better arguments for such a scheme. It applies, in a limited way, to welfare states more generally.

 

Conservatives have a related problem: If Republicans have demonstrated nothing else in this century, it is that the United States cannot eliminate the federal budget deficit, or even stabilize it, under our current tax system. And Republicans who also want to shrink the tax base by reducing or eliminating taxes on favored constituencies make the same error as progressives. For Republicans, that’s a political error, too: Ronald Reagan used to brag about all the low-income and middle-income Americans who were effectively taken off the income-tax rolls on his watch, but that created a problem for his political heirs, who still try to run on federal income-tax cuts in a country in which half of the people pay little or no federal income tax. Republican tax cuts end up being “tax cuts for the rich” because almost any substantial income-tax cuts in the current system would disproportionately benefit high-income Americans, who pay almost all of the federal income taxes.

 

A broader tax base makes it possible to raise more revenue, and it also helps to stabilize revenue.

 

It is also important to remember that the relationship between top tax rates and actual tax revenue is far from straightforward. In 2019, with a top tax rate of 37 percent, the U.S. government collected about 16.3 percent of GDP in taxes, while in 1951 — with a top tax rate at a sobriety-inducing 91 percent — the U.S. government collected only 15.8 percent of GDP in taxes. Throughout the 1950s and 1960s, when top tax rates were very high compared to where they are now, the U.S. government collected an average of 17.1 percent of GDP in tax revenue, very similar to the 16.8 percent of GDP collected on average since 2000 and a bit less than the 18 percent average of the 1990s. The Democrats’ faith that raising taxes on the rich would make a lot more money available for college subsidies or infrastructure or free false teeth or whatever is not necessarily supported by experience.

 

Biden’s tax plan is a lot like the rest of the Biden campaign: limp, overly focus-grouped, and excessively triangulated. Our tax code needs major reform — this swill is not it.