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Biden’s tax policies would harm investment, jobs, and innovation

President Joe Biden has big plans to create jobs and raise wages by spending more on infrastructure and industrial policies and to improve conditions for ordinary folks by funding pre-K education, free community colleges and child allowances with higher taxes on corporations and on the incomes and capital gains of affluent Americans. Those taxes may appear just and political appealing but could prove jobs killers.

Raising the federal corporate tax from 21% to 28%, combined with higher personal income taxes for those earning more than $400,000 and state taxes, would raise effective taxes on profits distributed as dividends from about 47.5% to 62.7%.

That would again encourage businesses to move manufacturing, R&D and patents offshore and to perform backroom services in India and similar places. And those taxes would significantly reduce the after-tax payouts from IRAs and other retirement savings for seniors.

Tax bite

Raising capital-gains rates for those earning more than $1 million from 24.8% to 43.4% would increase their combined state-federal tax bite in California and New York City to at least 53%.

Over the decade prior to COVID, prices on stocks held for 10 years reflected an 18% loss owing to inflation. That would raise the real top real tax rate on capital gains in the Golden State and the Big Apple to at least 70%.

For family businesses, the bite would be particularly onerous. Biden wants to both tax capital gains at death and to levy the estate tax. That would impose a death tax on many businesses of more than 70%. 

In most cases, it would simply be too expensive to buy enough life insurance on the founder and spouse to cover these taxes, and those would force the sale of many car dealerships, general contractors and other decent-sized businesses. Their children could be left without jobs in family enterprises and certainly wondering why Mom and Dad worked so hard to build a legacy.

In the high-tech sector, venture capitalists gamble on startups promising to solve tough engineering problems. Often the goal is a big payout from an initial public offering or by selling out to a behemoth like Google GOOG, +0.76%, Amazon AMZN, -0.14% or General Motors GM, +0.57% with the proceeds taxed at preferential capital-gains rates.

Locked in capital

Entrepreneurs are good at spotting consumer interests and solving tough design problems. They lack Elon Musk’s flair for marketing or Tim Cook’s skills at government-business and international diplomacyHigher capital-gains taxes would encourage founders to hold on to to businesses longer than their broader management skills warrant.

At once, this lock-in effect would lower the value of startups to venture capitalists, discourage investment in high-risk, high reward new businesses, and slow the dissemination of new technologies through the U.S. economy and sales in foreign markets. Those would reduce the overall contributions of new businesses to U.S. productivity growth, higher wages and international competitiveness.

The U.S. economy is increasingly reliant on high-tech entrepreneurs to drive the modernization of traditional manufacturing such as autos and create whole new industries such as cloud computing and collaboration software that power the virtual workplace. 

Biden’s capital-gains taxes would smother many American inventions in the cradle and send engineering entrepreneurs looking for funding in China and innovation-friendly countries in Europe such as the Netherlands, Switzerland, Germany and the U.K.

Simply, Biden’s corporate and capital-gains taxes would stifle employment and hammer down wages both for high-tech workers and more ordinary service-sector workers in metropolitan San Francisco, New York, Boston and other high-tech centers.

This would reduce state and municipal tax revenues. Vital public services would be difficult to fund in those core cities, instigating more crime, poorly performing schools, and a host of other social problems.

Laws of supply and demand

Progressive policy analysts that populate the Biden administration and receive lots of media time read from a peculiar book of economics. They campaign for a carbon tax—after all raising the price of emissions would cause Americans to use less fossil fuels. But raising the price of capital would have no impact on risking taking or investment?

In seems the laws of supply and demand only apply when those support progressive policy objectives.

On whole, Biden’s taxes are an assault on U.S.-based manufacturing and high-tech innovation and would make lower income Americans working in our most affluent cities and middle-class suburbanites worse off.

Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.

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