Three Reasons Why The Biden Tax Increase Makes No Sense

These do not even start to address the rise in mandatory spending that drives the structural deficit above 2.5% of GDP.

Second, the impact on the economy will be larger than what the Biden administration estimates. These tax increases do not affect only “the rich”. Such high capital gains tax stifles innovation and reduces capital flow into private equity which is essential to boost start-ups and new high-productivity businesses. This is the reason why Europe has reduced capital gains taxes and even eliminated them. Belgium, Luxembourg, Switzerland do not have capital gains tax. Of the countries that do levy a capital gains tax, Greece and Hungary have the lowest rates, at 15 percent. European countries average is 19.3 percent. The same happens with the corporate tax rate. The United States would have the highest corporate tax rate in the OECD under Biden’s plan (28%). Many argue that effective corporate tax rates are lower and that in other countries firms pay VAT, and the arguments are only partially correct. The European Commission showed that the effective average tax rate of United States companies was 36.5% compared to 21.1% in the average of the European Union. When comparing effective rates, many United States analyses play the trick of adding loss-making companies or averaging what a Tech giant pays in the U.S. with the rest of the sectors. However, none of these arguments matter if you look at the Tax wedge that United States companies pay relative to other OECD companies. According to PWC, the total tax wedge and contribution of United States businesses was 43.8% (profit, labor, and other taxes) compared with a region average of 38.9%

The risk of outflow of capital from the United States to other countries with more competitive taxation is evident to anyone that has run a business or a financial firm.  These tax increase may have little impact on multinational corporations, but they do have an exceptionally large negative effect on medium-sized businesses. That is why these measures are regressive.

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