J.D. Tuccille: Kamala Harris’s high tax and spend scheme would bring economic ruin

Kamala Harris, or at least the people running her presidential campaign, somehow settled on the notion that the federal government doesn’t consume enough of the country’s productive output and needs to tax the American people more. It’s a proposition that runs up against evidence that her proposals are likely to inflict ruin, and that the economy imposes natural limits on the amount government can extract from taxpayers no matter what policies are put in place.

In a campaign driven by “vibes,” it’s difficult to parse concrete policy ideas, but Kamala and company have let slip a few specifics. Added to the Biden-Harris administration’s budget proposal, which Harris endorsed as vice president, we can see where she wants to increase tax burdens. While a scheme to tax unrealized capital gains — paper profits that go up and down before being cashed in — draws attention, even more harm would result from hikes in the income, corporate, and regular capital gains tax rates.

“Taxes would go up sharply on some high-income households, and top marginal tax rates would reach their highest point since 1986,” notes The Wall Street Journal’s Richard Rubin.

The unrealized capital gains tax — a wealth tax by another name — would apply to those with assets greater than $100 million, according to the Biden-Harris proposed budget for Fiscal Year 2025. It would subject those taxpayers to “a minimum tax of 25 per cent on total income, generally inclusive of unrealized capital gains.”

True, most people have little sympathy for those who can hire attorneys and accountants by the battalion to do battle with tax collectors. Surely, the rich can watch out for themselves. But these are the people who make large investments and build companies that produce jobs and prosperity for others.

“Investors may be less likely to invest in growth-oriented ventures due to greater swings in valuation compared to larger, established companies” that would result in high tax bills, warns Siri Terjesen, a professor and associate dean at Florida Atlantic University College of Business. The result would be “a kill switch for entrepreneurship.”

Also, taxes targeted at the wealthy today have a way of broadening their reach when politicians grab for more money. The income tax was originally sold as a way to “soak the rich” but very soon ended up drenching a much larger share of the population.

But that’s not the worst of the Harris tax proposals.

Harris’s plan to raise the federal corporate tax rate to 28 per cent and the top capital gains rate to 44.6 per cent “would give the United States the highest total tax rate on corporate income in the developed world when combined with state taxes” points out the Cato Institute’s Adam N. Michel.

That would make the U.S. uncompetitive and give businesses and high-wealth individuals a strong incentive to relocate elsewhere.

The brainstorms continue with subsidies and tax credits for homeowners, higher taxes on stock buybacks, an end to the deductibility of compensation for high-income employees, a me-too aping of Donald Trump’s plan to exempt tips from taxation, and a vow in the 2025 budget proposal to seek implementation of a “global minimum tax” to make it harder for people to escape the clutches of the U.S. government (a good sign its authors know they’ll drive people to flee).

The planned tax hikes in the 2025 budget total $5 trillion and “the cumulative economic losses from Harris’s tax hikes will be death from a thousand cuts,” warns Michel.

Those thousand cuts will be painful indeed. The Tax Foundation warns that Harris’s ideas “would further entrench social policy and spending into the tax code” and ultimately would worsen “an unsustainable debt trajectory.” Regarding Harris’s spending and tax plans, the Committee for a Responsible Federal Budget (CRFB) says “the policies in this plan would increase deficits by $1.7 trillion over a decade.”

One problem is that no matter who controls the White House or Congress, federal spending is growing as a share of Gross Domestic Product while tax receipts stubbornly resist increase. Federal Reserve Bank of St. Louis figures show U.S. federal expenditures generally stayed at or below 20 per cent of GDP until recently, except during crises like wars and the pandemic. But they’re creeping up and the Congressional Budget Office (CBO) expects expenditures to total 23.9 per cent this year and 24.9 per cent by 2034.

That’s not a huge surge, but it’s a steadily rising mismatch with revenue figures that have barely budged as a share of GDP since the 1950s. “On average, the United States has raised about 18 per cent of GDP in tax revenue,” notes Veronique de Rugy of the Mercatus Center at George Mason University. The CBO puts revenues at 17.2 per cent of GDP this year and 18 per cent from 2027 through 2034.

That’s not because politicians don’t want to raise more. It’s because Americans change their behaviour after each tweak in the law, resulting in a return to the mean after a brief blip.

The result is a widening gap between what’s spent — and Kamala Harris wants to spend a lot — and taxes collected. That means growing deficits and accumulating debt. Using assumptions very generous to the government, the CBO forecasts that debt held by the public will rise from 99 per cent of GDP this year to 122 per cent a decade from now.

There’s plenty of reason to think that aggressive tax schemes likely to discourage investors and shrink the economy will worsen deficits and debt, just as the CRFB and other economic forecasters expect.

Let’s emphasize here that Harris’s main challenger, Donald Trump, is no champion of fiscal responsibility. While his tax cuts benefited the majority of Americans, he takes away with tariffs on imported goods what he grants in relief to income-earners. Tariffs, while targeted at foreign firms, ultimately fall on domestic businesses and consumers in the form of higher prices. The Tax Foundation cautions that, if his proposal for a 10 per cent baseline tariff and a 60 per cent tariff on Chinese imports are implemented, trade war could ensue and the results “would more than offset the entire benefit of the major tax cuts for economic output and jobs, resulting in a net loss for the U.S. economy.”

If you’re looking for good tax and spending policy in this year’s presidential campaign, it’s not being offered by either major candidate. But Kamala Harris threatens to inflict a world of tax pain.

National Post