With Joe Biden’s inauguration as President of the United States, substantial reforms are coming against the Donald Trump Administration’s legacy. Biden stood as the former president’s antithesis during the election. But to win the presidency, he surrounded himself with the populist wing of the Democratic Party.
Among the changes that the Democratic president will try to promote are a substantial increase in the nation’s corporate taxes, an increase in the minimum wage, and the expansion of the so-called Obamacare, which faces a serious problem of sustainability.
The most worrying thing is that Biden does not seem to have any restraint on spending. His agenda promises everything from millions of dollars in investments for the Green New Deal that he borrowed from Alexandria Ocasio-Cortez (D-NY) to a fiscal stimulus of $1.9 trillion, in which he will try to force the minimum wage of $15.
1) More taxes for the rich, more taxes for everybody
Joe Biden will make substantial reforms to his rival’s tax policy, beginning with restoring marginal taxes on incomes over $400,000 to the pre-Trump rate of 39.6%. The new president also plans to reverse Trump’s flat 20% capital gains tax – reduced to that rate by Trump – for those with income over $1,000,000 restoring it to 39.6%.
Biden also proposes raising the corporate tax from 20% to 28% and creating a minimum 15% tax for companies that pay no U.S. income tax and report more than $100 million in net U.S. income.
According to his campaign, Biden’s tax plan would raise $4 trillion, but the Tax Policy Center says that because of the outflow of capital from the country, this collection could be less, $2.1 trillion. According to the Tax Foundation’s modeling, the new president’s tax plan could cost the U.S. economy 1.6% growth in the long term.
In addition to the corporate tax increase, a significant fraction of shareholders would be subject to Biden’s increase in personal tax rates on dividend income and capital gains.
This increase in taxes could translate into companies leaving the country,passing on costs via prices to consumers, and even reducing hiring levels. With a recovering economy whose growth is driven by an unprecedented monetary stimulus, taxing the real sector will only stagnate economic growth.
2) Biden seeks to impose a $15 per hour minimum wage
While the U.S. is experiencing several bankruptcies not seen since the 2009 crisis, and some economists predict a new wave of bankruptcies in 2021, Biden seeks to sneak the approval of a federal minimum wage of $15 an hour.
Democrats have typically tried to sell the idea of a minimum wage as an imposition on corporations. Yet, most of the companies paying the minimum wage are small or medium-sized, whose cash flow has been affected by the pandemic.
The minimum wage measure is harmful because it could lead to layoffs and discourage job creation, and the American economy needs that badly. The pandemic has cost more than 22 million jobs, 10 million of which have not been recovered. At a minimum wage of $15, this recovery could be much slower and more painful for the United States.
With a Democratic majority in the House and Senate, Biden needs only 10 votes from Republican Senators in favor of his stimulus plan to make the minimum wage increase a reality. However, Republicans are unlikely to give in to pressure from Biden to set a federal minimum.
3) Biden will expand and reform Obamacare with taxpayers’ money
Another proposal by Biden that could prove harmful is his willingness to expand the Affordable Care Act (ACA) of his political sponsor Barack Obama. Obamacare has already presented several sustainability problems, it is unaffordable for families above a certain level of income. In some states, its existence has discouraged the proliferation of a private insurance market for the poorest households.
The ACA provides families with a refundable and advanced income tax credit to purchase health insurance. The premium credits take contributions as a share of income for families with wages between 100 and 400% above the federal poverty line ($12,490 to $49,960 for an individual in 2020).
Income tax credits keep premium payments low for ACA recipients. This subsidy structure has led to a lack of affordable individual market coverage options for people below the poverty line who live in states not covered by Medicaid and people with incomes just above 400% of the poverty level in all states in the nation who purchase their own coverage. In addition, people eligible for “affordable” employer-sponsored insurance are not eligible for other transfers.
One of the main criticisms that ACA has received is the so-called subsidy ridge, which primarily affects people who are just above the subsidy’s income limit. This situation has particularly affected adults over 60 years of age.
The idea of expanding Medicaid is to avoid the so-called subsidy ridge by increasing the number of members and removing the income limits that can access insurance. The problem with this logic is that it remains unsustainable, and Biden’s own team recognizes that there has to be a tax increase to fund the cost of expanding Medicaid.
The Medicaid expansion will be funded by the 20% capital gains tax for those with incomes over $1,000,000. The changes also potentially affect marginal tax rates on employment and earned income. From an aggregate perspective, Biden’s proposed changes to payroll deductions would increase the average marginal employment income tax rate by 1.7% to 2.4%.
Biden’s economic plan is a major shift in the outgoing administration from its Medicaid expansion to its labor and tax policy. While an economy like the U.S. could withstand the changes imposed under Biden, the country is at an uncertain point where it still has to deal with the effects of a pandemic, a real sector in recovery, and debt that exceeds the nation’s domestic product.