Raising taxes will hurt the economy

The idea that the agenda of Joe Biden would be positive for the economy is taken to mean that his plan to increase taxes would also be positive for the economy. However, it is a mistake to think the corporate or individual income taxes can be raised without negative effects.

His campaign recently told the New York Times, “Tax increases now would accelerate growth by funding a stream of spending proposals that would help the economy.” So the argument seems to go that because higher tax rates could fund new programs, higher tax rates would help the economy. But as noted by Douglas Holtz Eakin, “The taxes are bad but all the better news for growth, if there is any, is in the spending proposals.” That means tax increases on business and higher earners would inflict damage on the economy no matter how the revenue would be spent.

In fact, all major analyses of the tax plan of Biden find negative effects on the economy. Estimates from the Tax Foundation model show that his tax plan would reduce productivity output by nearly 1.5 percent over the long term. The magnitude varies across estimates due to different factors, like how open the economy is, but the direction does not.

The proposal from Biden to raise taxes does not look strong considering the fragile economic recovery. Imagine if his administration will enact a corporate income tax rate increase with Congress next year. It would hit companies as they are starting to come out of the coronavirus recession. It would make investment and hiring plans less viable.

As a result of that tax increase, companies would be less competitive and would face a higher cost of investing in the United States. Not only would this discourage investment for a nascent economic recovery when more investment is needed, it would also burden workers. Estimates show that half the burden of the corporate tax increase would rest on workers over the long term. The Congressional Budget Office assumes a fourth of the burden of the corporate income tax falls on workers.

While his advisers are encouraging Biden not to wait to increase taxes because the associated spending will bolster the economy, others are doubting the wisdom of tax increases when our growth is the goal. As Michael Strain notes in Bloomberg Opinion, “Tax increases would slow growth or leave it relatively unchanged. Why use any capital on those policies that will not speed up the economic recovery?”

The notion that tax increases are positive for the economy is false. Hiking the marginal tax rates on labor or capital will reduce the incentive to work or save even if the higher revenue will be used well. There are other ways to raise a dollar of revenue for any given purpose. That reality is obscured when we focus on these effects of taxes and spending.

Erica York is an economist with the Tax Foundation based in Washington.