President Biden is proposing to spend several trillion dollars (current estimates are around $4-6 trillion, if he can get it through Congress) on a bunch of things like infrastructure that certainly sound like good things to do. The question, as always, is how to pay for it. In general, we American voters want lots of stuff from the government - a generous social safety net, a strong military, good roads, subsidized or free education, lots of special interest subsidies, etc - but don’t really want to pay for it. Raising taxes is the third rail of America politics.
And politicians in both parties in recent decades have gotten around the reluctance of voters to pay more taxes by simply borrowing more to pay for their pet schemes. They have borrowed so much that the US is now in the select company of nations like Greece and Venezuela in terms of debt to GDP. (as of first quarter 2021, the “official” US federal debt is 127.5% of GDP. The real debt, counting the off-the-books unfunded future commitments to federal pensions, military health services, Social Security and Medicare, is some 5-10 times greater, depending on how it is calculated)
So Biden is making one of the two perennial promises that politicians make, to tax the rich and corporations more (the other perennial political promise is to find money by reducing “waste, fraud, and abuse”). In the end neither of these two promises ever gets fulfilled, and neither ever produces the amount of new revenue projected, so whatever is being proposed in the end gets funded mostly by more debt. That will almost certainly be the case this time too.
US corporations are already subject to a 21% federal tax rate. So (to channel Dr Phil) how is that working for us? Go here for a list of 55 major U.S. corporations that paid no tax whatever in 2020. Indeed, some got millions of dollars back from the government instead, giving them a negative tax rate. And those are just the ones that did it legally, and in the U.S., using all the tax loopholes that Congress has given them over the years. Then there are the ones that use tax havens. See here for how a Microsoft subsidiary “in Ireland” (where it has no employees and only a law office address), by being “resident” in Bermuda, paid no taxes on $315 billion in profits in 2020.
President Biden seems to be succeeding in getting other nations to agree in principle to a uniform minimum 15% tax on multinational corporation, but already the British want to exclude British financial services (to stay comparative after Brexit), and Ireland wants an exemption for smaller nations (to level the playing field against larger nations). By the time the lobbyists and special interest groups get finished, whatever deal finally emerges, if any, will likely have so many exemptions and loopholes that it will make little difference.
And how about the rich? The rich are already subject to a top federal tax rate of 37%. Again, how is that working for us? The recent leak of IRS tax data to ProPublica on the wealthy tells the tale. The previous post showed that the four richest people in the US (Warren Buffet, Jeff Bazos, Michael Bloomberg, and Elon Musk) paid federal taxes at rates ranging from one tenth of one percent to just over three percent. An analysis by ProPublica of the tax records of the 25 richest people from 2014 to 2018 shows they paid an average federal tax rate of 3.4% - LEGALLY!
None of this is particularly surprising., We have all known for a long time that big corporations and the rich can afford to hire the legal and accounting talent to evade their taxes, and to buy the votes in Congress to slip their loopholes into normal bills. For example, did you know the 2021 COVID relief bill, supposedly needed for urgent relief in the pandemic, also included a tax break for brewers, and another for NASCAR owners? The previous COVID bill even included a tax break for racehorse owners!
The bottom line here is that I seriously doubt that President Biden’s promise to tax the rich and corporations more will amount to much. Oh, he may well succeed in getting some legislation passed that he can brag about, but I doubt very much that it will make a significant difference in the revenue collected by the federal government, since the government doesn’t seem to be able to enforce on major corporations or the rich the tax rates that are supposedly already in place.
Still, I suppose promising to tax corporations and the rich more is good politics, and perhaps most voters are naïve enough to believe the promises. But in the end, all this new spending will almost certainly be funded mostly by more debt, pushing the U.S. even further into the danger zone. And in the end it is our own foolishness as voters that is allowing this to happen.
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