by Don Fredrick, The Complete Obama Timeline, ©2021
(Jan. 12, 2021) — Democrats claim Joe Biden will boost the economy and create jobs with a proposed 10 percent tax credit for investments that create manufacturing jobs in the United States, and a doubling of a 10.5 percent tax rate (to 21 percent) on foreign profits of American companies. To non-thinking people (i.e., many Democrats), those two proposals sound like great ideas. But they are not necessarily what they seem, partly because Geriatric Joe also wants to increase the corporate income tax from 21 percent to 28 percent. His proposed 10 percent tax credit on investments that create manufacturing jobs in the U.S. would, in most cases, be far more than offset by the 7 percent hike in the corporate income tax. An example makes that clear:
Assume Corporation X has $1 billion in taxable profits in calendar year 2021. The proposed increase in the corporate income tax from 21 percent to 28 percent means Corporation X would see a tax of $280 million, rather than $210 million. That is a $70 million tax increase under Biden.
Now assume that Corporation X, during 2021, invests $50 million in a new or expanded manufacturing facility that hires additional American workers. A 10 percent tax credit for that $50 million investment would mean a $5 million tax credit. But that $5 million saved by Corporation X would not offset the additional $70 million it must pay in higher corporate income taxes. Corporation X is not better off by $5 million. It is worse off by $65 million. To pay its 2021 federal taxes, the business must come up with an extra $65 million over the $210 million it had anticipated paying under a 21 percent rate. But, unlike the federal government, corporations cannot create money out of thin air. Corporation X must get that additional $65 million from somewhere. It will come from one or more sources: Reduced or canceled business expansions in the future. A sale of company stocks (which may result in a decrease in the stock price for investors, including holders of IRA and 401(k) accounts). Reduced or eliminated pay increases for employees. Scaled-back hiring plans. Robotics to reduce employee counts and labor costs. Reduced expenditures on research and development. Lay-offs or terminations. Increased prices on its products.
Consider also that Biden’s 10 percent tax credit does not apply to all corporations. It applies only to expenditures that create manufacturing jobs in the U.S. Tens of thousands of American businesses provide services and manufacture nothing (hotels, restaurants, software companies, consulting firms, trucking companies, retail stores, etc.). None of those businesses will be able to take advantage of the 10 percent tax credit, but they most certainly will be subject to the 7 percent increase in the corporate income tax rate. Further, of course, not every corporation that does manufacture a product will expand operations and create new jobs. Only a small number of corporations in the U.S. will therefore be able to take advantage of the 10 percent tax credit, while all will be subject to the 28 percent income tax.
Biden’s proposed doubling of the tax rate on foreign profits of American companies would seem by many to discourage companies from moving operations overseas. In fact, it will encourage companies with existing overseas operations to keep those profits overseas and not return them for investment in the U.S.—because overseas profits are taxed in the U.S. only if returned. Doubling the tax rate may discourage some companies from moving operations overseas, but the U.S. tax rate is zero if the profits are kept overseas. Corporations with overseas operations are, of course, taxed by the countries in which they reside, but most countries have corporate tax rates that are less than the 28 percent rate Biden seeks. (Ireland’s corporate tax rate is 12.5 percent. Moving an operation to Ireland to slash corporate taxes from 28 percent to 12.5 percent is not unlike an American citizen moving from New York to Florida to escape onerous income and property taxes.)
The United States is one of the only nations that taxes profits made by corporations overseas. If a Japanese company makes automobiles in the United States, for example, it pays corporate taxes on profits earned in the United States, but that company does not also have to pay Japanese taxes on those same profits. The U.S. Congress, of course, rarely misses an opportunity to impose a tax wherever it can, so it essentially imposes double-taxes corporate profits. The evil concept has spread to California, where the legislature has considered levying its state income tax on the retirement income of residents who move to another state. For example, a police officer who spent 30 years working in Los Angeles and who then retires to Colorado would be forced to pay state income taxes on his retirement benefits to both Colorado and California. Similarly, more than a few New York politicians object to older residents retiring to Florida, which has no state income tax. New York apparently wants to keep its hands in the pockets of former residents until the day they die—and probably beyond if they could. (No one should expect Joe Biden to object to such obscene proposals should they become law in some states.)
The poorly-advised Biden also wants to increase capital gains taxes—to an astonishing 39.6 percent! Only an economic idiot would believe that tax would actually yield a 39.6 percent return. It most certainly will not, because a high tax rate discourages investors from selling their assets. That is common sense. If Sally Citizen bought stocks years ago for $60,000 and had sold them in 2020 for $100,000, her $40,000 gain would have been taxed at 20 percent, or $8,000. But if Biden’s 39.6 percent rate is approved and Sally instead sells her stocks in 2021, her $40,000 gain would result in a tax of $15,840! What might she do? Rational, thinking people might guess that Sally will simply decide to not sell her stocks. Will Biden then get $15,840 from Sally in taxes? Of course not! He will not even get $8,000 in taxes from her because there is no tax if there is no gain, and there is no gain if Sally does not sell her stocks. She may very well hold the stocks and patiently wait for Congress to reverse its course and lower the tax rate, after it realizes it has made a monumental mistake. (Biden and his advisors apparently believe that 39.6 percent of nothing is better than 20 percent of something.)
The reality is that a massive increase in the capital gains tax actually reduces tax revenue because investors stop selling. If the rate is lowered, tax revenue actually increases because more investors sell their assets. Biden is too weak-minded to understand that doubling a tax onsales does not double the tax revenue because there are reduced sales. This is common sense and has been historically proven by previous tax cuts. (If the tax on gasoline is doubled, will you drive just as many miles and buy just as much gas as you did before? Not if you do not have to.)
If the capital gains tax is raised to 39.6 percent, the resulting drop in sales of assets will result in a loss of jobs. New jobs are created by new businesses, and new businesses require investments. But those investments usually come from people who sell old assets to obtain the cash for the new ventures. The Wuhan virus caused thousands of small businesses to fail. Across the country there are restaurants and other businesses just waiting to be scooped up by investors eager to make money after the virus has run its course and life returns to normal. But to buy a closed restaurant and re-open it requires cash, and that cash would ordinarily come from the sale of an asset (such as stocks). An investor may very well look at the situation and say, “A restaurant is a risky venture. I might be willing to risk $200,000 on buying and re-opening that shuttered restaurant down the street, but if I first have to pay 39.6 percent to even get access to my cash, I think I will take a pass.” Biden’s tax increase may mean that restaurant remains closed and its workers remain unemployed.
Aside from taxes, Biden supports other counter-productive measures. He is eager to see the minimum wage boosted to $15 per hour, incapable of understanding that such an increase may very likely cause more harm than good. Yes, many people will take home higher paychecks. But businesses will have to increase prices to cover the increased labor costs. Everyone, rich or poor, will pay more for a hamburger, a gallon of milk, or a loaf of bread. (Biden and the 535 members of Congress can afford that. But can you?) In addition, many people will lose their jobs. Some will be replaced by machines, including self-order kiosks in fast-food restaurants. Many low-skilled workers will be laid-off and may have a difficult time trying to find new jobs. A factory with three janitors who are paid $10 per hour may fire the janitor with the least seniority (or the least impressive work ethic) and demand that his two remaining co-workers take up the manpower slack in exchange for their new $15 wage rate. (Is the laid-off janitor better off unemployed at $15 per hour or employed at $10 per hour?)
Actions have consequences. Foolish actions can have disastrous consequences. It is bad enough that Joe Biden does not understand that. It is worse that the millions of people who voted for him are also unfamiliar with the principle of cause and effect.
Good luck surviving in 2021 and beyond…