History shows Democrats’ tax proposals will hurt hiring, wages and economy

Investors finally got a glimpse of how Democrats intend to pay for their $3.5 trillion spending spree. It did not go well; the Dow sank almost 300 points, despite a slightly better than expected inflation reading.

Who can be surprised? When you snatch more than $2 trillion away from job creators and investors for the purpose of income redistribution, as Democrats propose to do via huge tax hikes, the country will suffer.

President Biden has promised he will not raise taxes on anyone making less than $400,000 per year. But among the proposals from the House Ways and Means Committee is a tax hike on the makers of tobacco, nicotine and vapor products.

Who will ultimately pay that bill, estimated to raise close to $100 billion? Consumers who smoke or vape, of course, the majority of whom fall under that income ceiling, and who will undoubtedly pay more for cigarettes and other products as manufacturers raise prices to cover the higher taxes.

That is not the only questionable premise in the proposed ways Democrats hope to pay for their $3.5 trillion “social infrastructure” blowout. Another is the astounding claim that the legislation will boost the economy, contributing $600 billion from “budgetary savings from faster economic growth.”

When has hiking taxes ever led to increased growth? Never. Taking money from investors and spenders and handing it over to bureaucrats and politicians leads to lower productivity, lesser wage gains and slower growth. Every time.

A wide-ranging study from the Tax Foundation in 2012 found, “Nearly every empirical study of taxes and economic growth published in a peer reviewed academic journal finds that tax increases harm economic growth.” 

For example, a study by economists David and Christina Romer analyzed the U.S. federal tax burden since World War II as a share of GDP and discovered that a tax increase of 1 percent of GDP lowers real GDP by about 3 percent after about two years.

Even President Clinton’s 1993 tax hikes, which Democrats claim led to the boom of the late 1990s, actually crimped the next several years’ expansion by about 1.5 percent, according to Treasury analysts.

The Omnibus Budget Reconciliation Act of 1993, passed by a Democrat-controlled House and Senate, and signed into law by Clinton, raised taxes on corporations and resulted in below-average post-recession growth and near-stagnant wages. Real hourly wages rose only 2 cents to $7.43 an hour in 1996 from $7.41 in 1992.  

It was actually Clinton’s tax cuts two years later, including a reduction in the capital gains tax rate, combined with welfare reform, which encouraged workers to return to their jobs by reducing disincentives to do so, that set the stage for the economic growth of Clinton’s second term.

There is a lesson there for Joe Biden.

Though the 1993 tax increase depressed growth mildly, the damage was in part offset by provisions in the bill that helped small businesses and encouraged workers. For example, the new law made permanent tax-exclusions of employer-provided educational assistance and allowed a targeted job credit to incentivize hiring qualified participants in school-to-work programs.

In addition, the bill allowed small businesses to take a tax credit of 5 percent of their qualified investment in depreciable property and allowed non-corporate filers to exclude 50 percent of the long-term gain from a sale of a small business stock from their gross income.

There are no business boosters in the plans just released by the House Ways and Means Committee. In particular, there is no help for small businesses, the major engine of U.S. job creation. On the contrary, small business owners take it on the chin. If small business owners pay taxes as individuals, they will be hit by a steeply higher top tax rate, and a new 3.8 percent surtax on small business income; they will also lose an existing 20 percent deduction on qualified business income.

Small business owners will also have a harder time passing their operation along to an heir, given that the death tax exemption will be sliced in half to $5.5 million.

Corporations also face higher taxes, which will reduce pay hikes for workers and once again leave our businesses paying the highest taxes in the developed world. How does that help U.S. competitiveness?

And wealthy individuals will pay more; those living in high tax states will pay as much as roughly 60 percent of their income over to federal, state and local authorities.

The exodus to Florida and other low-tax locales will continue.

Some Republicans claim that Democrats are poised to push through the biggest tax hike in U.S. history. Democrats dispute that, pointing out that the tax increases enacted during and immediately after World War II were bigger, when compared to the nation’s total output, or GDP.

Okay, but we are not at war. There is no nation-saving reason for Democrats to spend $3.5 trillion today.

We do not have to “rebuild our economy”; we do not have to prepare our defenses against a threat from without; we do not even have to manufacture jobs so that Americans can go to work. There are nearly 11 million job openings. If we have an economic emergency, and most would argue we do not, it is the extreme labor shortage brought on by excessive and unnecessary federal handouts.

No, we are about to embark on a socialist experiment, creating unaffordable cradle-to-grave entitlements, entirely for political reasons.

Americans are not stupid. They will soon see that Democrats’ tax hikes are bad news for our country. And they will conclude that $2 trillion is too high a price to pay.

Liz Peek is a former partner of major bracket Wall Street firm Wertheim & Company. Follow her on Twitter @lizpeek.