Biden Shouldn’t Raise Taxes in a Weak Economy

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A top priority of the Biden White House would be to raise taxes on high-income Americans and corporations. This is wrong-headed. Hiking taxes while the economy is so weak would set the recovery back by leaving people with less income to spend. And a President Biden would only have so much political capital. His first priority should be to use that capital to advance the recovery by supporting the economy’s productive capacity.

And even in a strong economy, the corporate tax rate should not be increased. I discuss in my latest Bloomberg Opinion column:

Companies would respond by investing less in factories and equipment in the U.S. Less investment means workers are less productive, which reduces their value to companies, lowering their wages.

In the debate over the 2017 corporate rate reduction, supporters and opponents alike got this story wrong. Supporters of the cut raised expectations that workers’ wages would immediately increase. But it takes time for lower taxes to improve investment, productivity and wages. Opponents pointed to the fact that many companies returned funds to shareholders following the tax cuts, rather than using the savings to boost investment. But the use of the immediate tax savings was beside the point. What mattered was how the new tax incentives affected future behavior.

In today’s political climate, the argument that higher corporate taxes would reduce wages may sound like a right-wing talking point. Instead, it is the standard view among economists. The nonpartisan Congressional Budget Office argues that workers bear 25% of the burden of the corporate income tax. The Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution, concludes wages and labor income bear 20% of the burden of the corporate tax.

Check out my column for my full argument. Your comments, as always, are very welcome.

Michael R. Strain — Michael R. Strain is the director of economic-policy studies and the Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute.  

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