Kamalanomics: Bold tax hikes on corporations and the wealthy – Ivo Vegter - Biznews
Kamala Harris’s tax proposals, exceeding Joe Biden’s in ambition, aim to increase rates on the wealthy and corporations, including a top marginal rate of 39.6% and raising the corporate tax rate to 28%. Despite alarming headlines about $5 trillion in new taxes over 10 years, the actual increase is more modest at $1 trillion. Harris’s plan seeks to shift the tax burden from the middle class to the wealthy, aiming for a more progressive system.
Ivo Vegter
Kamala Harris, unsurprisingly, favours tax increases on the rich and on companies, going even further than Joe Biden’s proposals.
I’ve been writing about the policies of Kamala Harris, the Democratic Party’s nominee for president in the United States (on price controls and housing), and no examination of her platform would be complete with a brief look at her tax proposals.
One would expect a fairly left-wing candidate for president to favour tax increases, especially targeting the rich, and on this score, Harris does not disappoint. However, on balance I’m surprised to find that her tax policy is not outrageous.
She proposes a higher top marginal tax rate, raising it from 37% to 39.6%, an increased surcharge to pay for Medicare for households earning over $400 000 per year, raising capital gains taxes to the equivalent of income taxes for those earning over $1 million per year, and jacking up the company tax rate from 21% to 28%.
This sounds like a lot, but the widely quoted “$5 trillion” in new taxes that has made headlines is misleading.
Not only is this figure spread over 10 years, but the Harris campaign has also floated $4 trillion in tax cuts over the same time period, and nobody earning less than $400 000 will see their taxes increase.
In essence, then, her tax plan seeks to raise $1 trillion over a decade, which amounts to $100 billion per year. In the context of total revenues of $4.4 trillion in 2023, or the projected tax haul of $63 million for the 10 years, this is not exactly extravagant.
Company tax
Increasing the corporate tax rate by a third, from 21% to 28%, sounds dramatic, but it rolls back only half of the tax cut that former president Donald Trump got enacted in 2017. It had been 35% since 1993 when Trump slashed it to 21%, and that tax cut was due to expire in 2025 anyway.
The current 21% rate is below the 23.4% average for the 38 member countries of the Organisation for Economic Co-operation and Development (OECD).
However, in addition to the increased federal corporate tax rate, American companies also face state-level taxes of between 2% and 11.5%. A seven-point rise in the base federal tax rate would put US companies at a disadvantage on the global stage, but it’s been worse for a long time in the recent past, including during some of the most productive economic booms in recent memories.
It’s interesting to note that while countries with the highest company tax rates in the world are a who’s who of socialist basket cases, those with the lowest company tax rates (excluding small enclaves with zero rates) are also not exactly thriving.
The 10 countries with the highest corporate tax rates are the Comoros Islands, Suriname, Argentina, Chad, Colombia, Cuba, Equatorial Guinea, Guinea, Malta and Sudan, but the countries with the lowest corporate tax rates are not much more impressive: Barbados, Turkmenistan, Hungary, Andorra, Bosnia and Herzegovina, Bulgaria, Kosovo, Kyrgyzstan, Macedonia, Paraguay, Qatar and Timor-Leste.
In general (and rather surprisingly), there is no significant correlation between corporate tax rates and economic growth.
Tax harmonisation
The Harris campaign has also promised to close some loopholes that allow companies to evade tax by means of deductions or by off-shoring revenues to lower-tax jurisdictions.
She has promised to raise the minimum rate at which corporations pay tax, no matter their deductibles, to 21% from 15%, and also to increase taxes on foreign profits.
It is hard to predict the economic consequences of these tax increases for American companies. While it intuitively sounds bad for business, it isn’t easily demonstrable that the economy will suffer much as a result.
What it will do, however, is allay popular discontent with corporate profits and corporate tax evasion. The sense that companies “pay their fair share” may well be worth the speculative costs of corporate tax increases.
Investment income
A similar argument can be made for personal income and investment income.
The Harris tax proposals aim to treat investment income just like regular income. Altogether, people earning in the top tax bracket can expect to pay up to 44.6% in income and other taxes under the Harris campaign’s plan.
At present, they pay 23.8% on capital gains, 29.6% on some business income and 40.8% on wages; all of these will rise to similar levels as income taxes, should Harris succeed in pushing her proposals through Congress.
On its own, this is controversial. It can be argued that since levying taxes tends to discourage the taxed activity (which is partly why “sin taxes” are levied on gambling, alcohol and cigarettes), it is bad policy to tax investment and investment income.
The Harris plan goes further, though. For very wealthy individuals with a net worth of over $100 million, she is also proposing to tax unrealised capital gains.
At the moment, capital gains are taxed only upon the disposal of an asset. Taxing capital gains annually raises a whole lot of hairy questions, including how assets ought to be valued, and where the liquidity to pay these taxes is supposed to come from if the asset is not sold.
Harris has also proposed to close a loophole that effectively cancels capital gains tax for assets that are inherited. Currently, capital gains tax is not payable on an asset that is left to heirs upon death (who pay only estate duty). The heirs only pay capital gains tax on the appreciation since they inherited the asset. Any asset appreciation during the late owner’s life thereby goes untaxed. Harris wants to make sure that tax is paid on the full value of capital appreciation.
Like all wealth taxes, the Harris tax plan has to be evaluated in the light of the fact that wealth taxes are hard to implement, have dubious value, and have historically not been effective.
Tax burden
The cumulative effect of the Harris tax proposals is less to increase the total tax burden, but to attempt to shift it from the poor and middle class to companies and the wealthy. Her proposals would make taxes more progressive, in other words.
By contrast, Donald Trump simply wants to extend his 2017 tax cuts that expire in 2025, and make up for the lost revenue by raising trade tariffs.
It is arguable that this would be a flatter tax, and therefore more fair, but it is also arguable that such a plan would be substantially worse for the economy, since trade barriers harm both producers and consumers, no matter their income.
It also suggests that Harris has the better claim about “rebuilding the middle class”, which, if it doesn’t score economic points, certainly scores political points.
As much as higher taxes are repugnant to free marketeers, it would be dishonest not to point out that the US tax burden is very low compared to its peers.
In the OECD, only Costa Rica, Türkiye, Chile, Ireland, Colombia and Mexico have a lower tax burden as a share of GDP. The average for the OECD is 34%, while the US tax burden is 27%.
This compares to tax burdens north of 40% for Denmark, France, Austria, Italy, Finland, Sweden, Norway and Belgium.
That suggests there is scope for moderate tax increases without significantly harming American competitiveness – and, as I mentioned before, the Harris proposals are not all that extravagant.
The political value of making taxes more progressive (or “more fair”, as most people would interpret the term fair) likely surpasses the marginal economic harm that Harris’s tax plan would incur.
Colour me surprised, but I’d describe her tax policy as tolerable.
Ivo Vegter is a freelance journalist, columnist and speaker
https://www.biznews.com/global-citizen/2024/08/30/kamalanomics-tax-hikes-ivo-vegter
This article was first published on the Daily Friend.