A new study commissioned by the National Association of Manufacturers estimates that President Joe Biden’s tax plan would cost the U.S. economy about one million jobs, as well as stagnant wage increases and slower economic growth of the U.S. gross domestic product.
The study, conducted by economists John Diamond and George Zodrow, assumes that all revenues are used to finance a proportional increase in government transfer payments to the various Social Security benefits. This allows the model to better isolate the effects of tax changes, which is common in such studies.
Second, the model assumes full employment equilibrium in the labor market for each period, which helps simulate changes in labor supply and demand.
Biden’s tax plan, if approved by Congress, would reverse former President Donald Trump’s tax reform, the Tax Cuts & Jobs Act, enacted in 2017. Specifically, the Democratic president’s reform would raise the corporate tax rate from 21 % to 28 %, eliminate tax deductions for certain classes of businesses (such as S corporations, which allow their income to be registered in the names of the company’s partners and deduct taxes in this way), and would increase the tax rate to 39.6 % of capital income and to individuals with incomes over $400,000.
Other changes included in Biden’s tax plan for the tax code are an increase in the 21 % minimum corporate tax rate and the elimination of accelerated depreciation expenses, which reduces taxes in the early years of an asset’s life, since the higher the depreciation charge the lower the actual tax liability.
The consequences of Biden’s tax plan
According to the authors of the report, in the short term the U.S. Gross Domestic Product (GDP) will have a $117 billion decrease by 2023, while in the long term, the economic losses will widen. Indeed, the U.S. GDP would lose $190 billion by 2026, and by 2031 there would be another $119 billion loss.
The decline in GDP is expressed by a drop in investment of $80 billion. Losses of tangible investment are even more sensitive to the increase in the marginal tax; it is estimated that investment would fall at a rate of 2.7% per year. By 2026 the economy would lose another $83 billion in capital investment and by 2031 investment would fall by another $66 billion.
As a result of this reduction in investment there would be a decrease in the number of hours worked, which, according to the authors, would fall at a rate of 0.7% per year. Taking into account the total number of working hours lost, the essayists estimate that the equivalent of one million full-time jobs would be lost by 2023. The decline would continue at a rate of 600,000 jobs per year before leveling off by 2026.
If Biden’s tax plan is implemented, transfers would increase by $77 billion, meaning there would be a $686 increase in such transfers for the average American household, at the cost of a loss of $662 in income.
In fact, Diamond and Zodrow estimate that real wages would fall at a rate of 0.3% per year and in the long run by 0.6%, including health benefits. The reason for this is higher operating costs imposed by tax reform, such as the elimination of accelerated depreciation, for example.
The Biden-Harris Administration’s tax plan (justified by his administration) will fund its $2.3 billion infrastructure program. In that regard, the tax reform is expected to raise approximately $2.5 billion.