Hey Kids, Tax Increases are Supposed to Slow Growth

May 28, 2021

Sometimes budget battles can get confusing, which is why it is important to keep your eye on the ball. That’s good advice for readers of the Washington Post’s article on President Biden’s proposed budget for 2022. The short piece deals with various aspects of the budget and then gets to Biden’s proposed tax increases:

“Conservatives also warn that the administration’s tax plans could slow growth. The administration has proposed increasing the corporate tax rate from 21 percent to 28 percent, while also imposing dramatically higher taxes on multinational corporations operating abroad. The White House has denied those plans will slow the growth rate, though Biden has said he’s willing to negotiate with Republicans on other solutions.”

The reason that Biden is proposing tax increases is to offset additional spending. The spending adds to demand and boosts growth. This can lead to concerns about inflation, which are discussed in this piece. The tax increases pull money out of the economy, which means that people will have less money to spend, thereby slowing growth, so as to relieve inflationary pressures. Slower growth is not an unfortunate side effect of the tax increases, it is the point.

There is an issue that the proposed tax increases, which largely undo Trump’s 2017 tax cut, could lead to less investment. This could have the effect of reducing growth in the longer term since less investment would mean slower productivity growth and therefore slower GDP growth.

However, there is zero evidence that Trump’s tax cut led to any noticeable uptick in investment, and therefore no reason to believe that reversing the tax cut would slow investment. Furthermore, orders for new capital goods, the largest component of investment, have been very strong. This indicates the fear of higher taxes is not discouraging companies from investing in new equipment.


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