Biden budget? Tax and spend, here we go again

President Biden has proposed his budget for fiscal year 2025. This proposal will increase government spending by more than 12% above fiscal 2024. He will raise taxes on corporations and the wealthy who he says are not paying their fair share. If enacted, this budget will increase inflation and slow economic growth.

Most of the increased spending will be for new social programs. He wants to, among other things, bring back child tax credits for low-income earners, funnel tens of billions of dollars to offset high home-building costs, spend billions on law enforcement and provide 12 weeks of paid family leave.

He is aware that the multi-trillion-dollar deficits he has run in each of his four years need to be reduced, especially considering that the public debt now exceeds $34 trillion. Biden says he will raise taxes on corporations and the wealthy to not only pay for his increased spending but to also reduce the annual deficit by $30 billion per year for the next ten years.

Trimming $30 billion per year on a $34 trillion public debt is insignificant.

Worse yet Biden expects to pay for his for this debt reduction and increased spending on social welfare programs by over-taxing the wealthy and over-taxing corporations. That will worsen inflation and slow economic growth.

Much of the inflation of the past three years was due to large annual government spending deficits. To continue to reduce inflation, government spending should be held as close to constant as possible.

When Biden increases government spending from fiscal 2024 level of $6.5 trillion to his proposed $7.3 a large increase in total demand in the economy will be created. That is very inflationary. Biden says he will increase tax revenue to pay for the increase in spending, which he believes will reduce demand so that his increased spending will not be inflationary.

That’s a bunch of poppycock.

When income taxes are raised on any taxpayer, it reduces disposable income. If low-income earners, who have little or no savings, are taxed, the reduction in disposable income will reduce consumption and total demand in the economy.

If, however, taxes on higher income earners are raised and their disposable income reduced, the wealthy will maintain their consumption but reduce their savings. If consumption from the wealthy remains constant there is no decrease in total demand. The resulting excess demand leads to more inflation.

The reduction in savings from high-income earners results in less capital formation for the economy. For businesses to meet the increase in demand with increased output, they need more capital and more labor.  We already have a labor shortage and with the decreased capital formation from over-taxing the wealthy, a capital shortage could develop.

That will make it difficult and more expensive for businesses to raise capital to expand output. If businesses can’t increase output, the only other way to respond to increases in demand is to raise prices. The result of Biden’s budget will be more inflation and less growth.

Over-taxing corporations will also lead to higher prices and less growth. Corporations must maintain their profit margins to stay in business. If their taxes are increased, they will have to raise prices.

When corporations look to make investments, they determine the expected return. Higher taxes reduce profitability, meaning many investments may no longer be profitable. That means less investment. That means slower growth.

Biden has never really defined what a fair share is.  According to the National Taxpayers Union, the top 1% of income earners pay 46% of all personal income taxes collected. According to the Wall Street Journal, the top 20% of income earners pay 87% of all personal income taxes collected.

How much more does Biden want them to pay?

Most economists will say that high tax rates slow economic growth and lead to inflation. We already have a substantial inflation problem which could worsen in the coming months. We already have a capital shortage problem since the federal government policies have led to a rapidly increasing $34 trillion public debt.

The correct fiscal policy action now is to reduce government spending, try to balance the budget and not raise taxes. If anything, reducing tax rates on capital gains would encourage non-inflationary economic growth with a tax revenue increase. Just ask Bill Clinton. That’s exactly what he did in his second term.

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