Biden’s Higher Taxes Would Kill The Golden Goose

Despite its problems, the U.S. economy outperforms those of other large countries. As The Economist recently noted, America’s 2022 GDP of $25.5 trillion was 25% of the world’s total output. GDP per person is much higher in America than in Western Europe or Japan, and the gap is growing. Unfortunately, the golden goose of economic growth is threatened by the Biden administration and other officials determined to impose higher taxes.

President Biden’s 2024 budget proposes several major tax increases that “would bring U.S. tax rates far out of step with international norms” according to the Tax Foundation. The increases include higher income tax rates on corporations and individuals, a complex new minimum tax on wealthy individuals, and higher Medicare taxes. Altogether, the tax increases total almost $4.7 trillion over ten years. As the figure below shows, these tax increases would place America’s top income tax rates among the highest in the world.

Many of these tax increases have been proposed before and failed for good reasons. Tax increases of this magnitude reduce savings and investment, resulting in slower economic growth and less innovation. In its analysis of Biden’s proposed tax increases, the Tax Foundation estimates they will reduce the country’s capital stock by 2.4%, long-run GDP by 1.3%, wages by 1%, and jobs by 335,000.

Economic growth is vital to a country’s long-term success. Wealthier countries have cleaner environments, better health outcomes, and generally happier citizens.

Growing economies are also more dynamic. Growth makes people more optimistic about the future, and this optimism causes more people to start new businesses or expand existing ones. Some of these businesses will fail, but the regular churn of business openings and closings means entrepreneurs are trying to find new ways to serve consumers.

A lack of business openings and closings is a sign of a weak, stagnant economy. Either entrepreneurs are too pessimistic about the future to take a risk, or entrenched businesses are able to use government regulation to keep competitors on the sideline.

A steady flow of new businesses also creates new opportunities for workers. During the pandemic, workers who changed employers had the highest wage gains. If less investment keeps new businesses from starting or old ones from expanding, there will be fewer opportunities for workers to find new jobs and climb the economic ladder.

Higher tax rates that slow economic growth also result in less tax revenue over time. People who want governments to have resources to provide a social safety net, take care of the environment, or build new infrastructure, should support strong economic growth. High taxes that slow growth kill the golden goose, as the example below shows.

In the figure there are three GDP growth tracks (lines measured on the left axis) that all start at $23 trillion (U.S. GDP in 2021)—high growth (3%/year), medium growth (2%), and low growth (1.5%). In the high growth scenario (blue), tax rates are low to incentivize work and investment, and as a result the government only takes 17% of annual GDP as tax revenue, which is close to the U.S. average over the last 70 years.

In the medium growth scenario (gray), taxes are higher, and the government takes 19% of GDP each year, or roughly the percentage it took in 2022. In the low growth scenario (orange), taxes are even higher, and the government takes 20% of GDP, or about the 80-year high it took during World War II.

In the beginning (year 1), tax revenue is highest in the high tax-low growth scenario (orange bar measured on right axis) and lowest in the low tax-high growth scenario (blue bar). But as time goes on, the faster rate of growth eventually overcomes the lower tax burden. By year 12, tax revenue is approximately equal across all three scenarios. By year 13, tax revenue is higher under the low tax-high growth scenario (blue bar) and the gap only widens from there.

This is the golden goose in action. Low taxes that stimulate economic growth allow the government to collect more tax dollars even though the proportion of GDP it takes each year is smaller.

Economic growth makes us wealthier, healthier, and happier. Growing economies create more opportunities for workers, which increases economic mobility. Governments can collect more tax revenue from growing economies than stagnant ones, which they can use to provide various goods and services. Higher taxes that endanger the golden goose threaten our continued prosperity.