Opinion

Why Do Democrats Want Higher Taxes When the Economy is Still Weak?

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Posted: Apr 02, 2021 12:01 AM
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Why Do Democrats Want Higher Taxes When the Economy is Still Weak?

Source: AP Photo/Michael Conroy

President Biden has vowed to impose $2 trillion in tax increases including a corporate income tax rate hike to 28 percent and a 21 percent “global minimum tax.” Democrats say that further tax increases, including doubling the capital gains tax, a second death tax, and income tax increases may be introduced in the coming weeks.

These same Democrats argue that the economy is still weak and that there is a long path back toward recovery. If this is true, why are they calling for one of the largest tax increases in history?

Earlier this month, House Speaker Nancy Pelosi (D-Calif.) said that we must "address the daily reality of joblessness and financial insecurity facing millions of Americans.” President Joe Biden has concurred saying that “it is very clear our economy is still in trouble.”

Given these statements how could they possibly justify trillions of dollars in tax increases in the coming months? 

Raising taxes will hinder the recovery by reducing new investment, jobs, and wages. Biden’s corporate tax hikes will not just hit companies, they will hit workers and families.

American workers bear a significant portion of the cost of higher corporate taxes. Numerous studies have found that between 50 percent and 70 percent of the corporate tax is borne by workers with the remaining being borne by shareholders. This occurs because capital is highly mobile while labor is not. Thus, there is nowhere else for the cost of the corporate tax to land on than the American worker.

As capital flows out of the United States and into more tax-competitive countries, American workers suffer through lower wages and fewer jobs. The Tax Foundation estimated that the corporate income tax hike alone would eliminate 159,000 jobs and reduce wages by 0.7 percent. 

Many of these job and wage reductions can be attributed to the fact that a high corporate tax encourages companies to do business elsewhere, meaning less money will be invested into the U.S. economy. According to American Action Forum’s Douglas Holtz-Eakin, Biden's tax and spending plan will shrink the economy by 2 percent and reduce investment in the U.S. by 5 percent.

Instead of raising taxes, lawmakers should get out of the way and allow the economy to regrow to pre-pandemic levels. Just before the pandemic hit in February 2020, the unemployment rate was at 3.5 percent.

We still have a long way to go to get back to that economy.

The unemployment rate is at 6.3 percent, and there are nearly 10 million Americans who lost their job during the pandemic. About 5.1 million workers are now out of the labor force and 6.6 million workers had hour and pay cuts because of the pandemic.

Higher taxes will prevent these jobs from coming back. Corporate tax hikes are borne by American workers through job loss, wage cuts, or the elimination of jobs which could have existed.

For a long time, both Democrats and Republicans agreed on a very basic economic principle: do not raise taxes during economic hardship. With their newfound power, Democrats have turned their back on that principle.  

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President Obama once said, "The last thing you want to do is to raise taxes in the middle of a recession, because that would just suck up - take more demand out of the economy and put businesses in a further hole." Senator Joe Manchin echoed the same sentiment when he said, “I don’t think during a time of recession you mess with any of the taxes or increase any taxes.”

Rather than crafting policies that will help the economy recover, Democrats are pushing a massive, multi-trillion dollar tax hike on American workers and businesses. Millions of Americans are still out of work or have not seen their wages recover from the pandemic. Why do Democrats want tax hikes that will make this problem worse?