President Joe Biden’s 2024 federal budget proposal offers a good, hard look at the administration’s priorities – and tax increases that go along with them.
Biden’s budget will raise taxes in significant areas of American life. Some will affect individuals, others will impact businesses, which will bring to the forefront the continuing argument over whether higher taxes leads to slower economic growth, or vice versa.
The reality for businesses is clear: if their taxes increase, they have to make up the difference somewhere: they can’t borrow indefinitely, as does the federal government. In some cases, it’s possible higher taxes can be absorbed without effect; however, most businesses don’t operate on such wide margins that they can afford to eat a significant new expense without it affecting the business.
This economic state of affairs has a relationship to Sir Isaac Newton’s Third Law of Motion: “Whenever one object exerts a force on another object, the second object exerts an equal and opposite on the first.” Applied to taxation, for every tax action of government there is a (not necessarily) equal and opposite reaction by individuals and businesses.”
Among the possible business responses are:
- Raising prices
- Hiring fewer employees or reducing staff
- Slowing down or reducing pay and benefits increases
- Slowing, downsizing, or eliminating expansion plans
- Putting the brakes on inventory growth
- Downsizing corporate buildings or facilities
- Seeking other cost-saving measures
- Some combination of the above
Advocates of higher taxes on those affected in the Biden budget plan say tax increases are necessary to ensure high-income individuals and corporations pay their “fair share” of revenue to support government spending, and that more government spending is beneficial to the economy and, therefore, to businesses.
Detractors contend that money taken out of the private sector slows economic and job growth, limiting the ability of people to support or advance themselves economically.
Three of the biggest tax items in Biden’s plan are:
- The corporate tax rate would increase from 21% to 28%, which would again place the United States at the top of the heap in terms of the first world’s highest corporate tax rates. The Tax Cuts and Jobs Act reduced America’s corporate tax rate to 21% from 35%.
- The top individual federal income tax rate would rise to 39.6% for single filers with incomes above $400,000, and $450,000 for married couples filing jointly. The top rate would apply to individuals making over $400,000 and married couples with incomes of $450,000 and up. This is a bit of a double-whammy: as the tax rate increases, the incomes on which it’s based are decreased. The present 37% rate is on incomes above $578,125 for individual filers, $693,750 for married couples.
- For taxpayers whose incomes are above $1 million, the budget proposes taxing their capital gains at 39.6%, with a 5% Net Investment Income Tax (NIIT). For lower incomes, capital gains would be taxed at the present 20%, plus the 5% NIIT.
There are a number of other tax-related items in the Biden budget proposal, which is meant to “reward work, not wealth,” according to reports of comments made by Shalanda Young, the White House director of the Office of Management and Budget.
There are those who believe that such a plan enables a fairer, or more “equitable” tax arrangement, which provides more revenue for proposed increased federal spending. For the other side, it’s taking money that could be used in the greater economy to grow businesses and jobs, and transfers it to government use.
With Republicans in charge of the House of Representatives, such wide-ranging tax hikes are unlikely to pass. But they’re on the table, for everyone to see.
This is the period of time, before the budget negotiations and arguing starts on Capitol Hill in Washington, to do two things: let your elected representatives know your feelings on these proposals, and, if you’re business owner, to plan for best-case, worst-case, and something in the between, in terms of how government action will affect your operations.