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Janet Yellen says critics of Biden’s tax hikes ask the wrong question

They want certain proposals, like the elimination of fossil fuel subsidies, to interfere with certain economic activities. They accept that higher corporate taxes reduce the profitability of business investments and may exclude even the most marginally profitable investments.

What Biden’s brain trust wanted to ensure was that the negative effects of tax hikes on businesses and the wealthy do not outweigh the economic benefits of what they fund: new spending on education and infrastructure and big tax benefits for less well-off families. Supported by independent analysts, they believe they have succeeded.

“The biggest threat to our economic recovery – and our long-term economic outlook – is not a slightly higher tax rate for large corporations or the richest 1% of taxpayers,” CNN told CNN. Secretary of the Treasury Janet Yellen by e-mail. “It’s a lack of support for American workers and families.”

“Ask ‘will these tax increases hurt the economy?’ is not the right question, ”Yellen said. “The right question is,” Is swapping higher taxes on high-income taxpayers for middle-class tax cuts and major economic investments good for growth? “And the answer to that question is a resounding yes.”

Biden must sell this deal to a majority of lawmakers to get his plan through Congress. Although polls show Americans support higher taxes on businesses and the wealthy, Republicans and business leaders have worked to stop them.

“The biggest job-killing tax hikes in a generation,” South Carolina Senator Tim Scott said in his Republican response to Biden’s speech to lawmakers last week. In a Business Roundtable survey of CEOs, 98% said Biden’s tax hikes would make their businesses less competitive, 75% said it would reduce investment in research and development, and 71% said that that would hinder hiring.

“ I wouldn’t say it’s a job-destroying disaster ”

These attacks sound familiar because they echo the tax hikes ordered by the last two Democratic presidents. In this case, Bill Clinton oversaw an economic boom and Barack Obama the longest streak of private sector job growth in American history.

Economic modeling, including that of conservative analysts, once again casts doubt on the dire Republican warnings.

The right-wing Tax Foundation predicted last year that Biden’s campaign tax proposals, which were larger than he had proposed so far, would shrink the size of the economy by 1.62% in 2050 Republican economist Doug Holtz-Eakin, after considering the benefits of the spending plans that tax hikes would fund, estimated that Biden’s plan would reduce the long-term size of the economy by just 0.2 %.

The conservative American Enterprise Institute saw a small long-term decline of 0.16% because of Biden’s tax hikes alone. “I wouldn’t say this is a job-destroying disaster,” said Kyle Pomerleau of AEI.

Echoing his 2020 campaign plan, the president proposed a series of tax hikes that include raising the top corporate rate to 28% from 21%, increasing the top personal rate to 39.6 % by 37% and increasing the capital gains levy to 43.4% for those with income over $ 1 million. He is committed to saving anyone who earns less than $ 400,000 through higher taxes.

Applying a “ pressure test ”

Since Biden took office, his economic advisers say they have worked with career staff at the Treasury Department and analysts borrowed from the Federal Reserve to “test the pressure” of his proposals. A key goal is to make sure that different pieces fit together.

For example, when they decided to close a loophole protecting profits from certain real estate transactions, Treasury officials feared entering into business partnerships that could include employees under $ 400,000. To avoid this, they exempted transactions with profits below $ 500,000.

To prevent some companies from exploiting as many deductions as they pay no federal tax, candidate Biden has proposed a minimum tax of 15% on companies with “book income” in excess of $ 100 million as reported to investors. After calculating that the loopholes closed elsewhere in Biden’s plan would cover all but a few companies, they raised the threshold for “accounting income” to $ 2 billion.

Biden proposed a powerful income-generating combination targeting wealthy heirs: higher rates of appreciation and a new requirement that these rates should be levied on the appreciation of inherited assets even if those assets have not been sold. . But to avoid the appearance of overkill, they put aside another campaign proposal to lower the $ 11.7 million threshold below which estates are exempt from what Republicans call “the death tax.” “.

Treasury economists say they have found no red flag in their analysis of the effects of tax hikes on different industrial sectors or representative examples of businesses and individual taxpayers. They continue to carry out macroeconomic modeling.

Biden’s assistants have declined to share specific results so far. But the treasury models resemble those used by the Tax Policy Center, which employs several former government economists.

A PTC analysis in November found that Biden’s campaign tax plan, by discouraging labor supply and investment somewhat, would shrink the size of the economy by 0.7% in 2023. The reduction would be reduced to 0.3% by 2030 and disappear by 2040.

“There’s a lot of uncertainty in that sort of thing,” conceded Eric Toder of TPC, a former treasury official in the Clinton administration.

The PTC analysis did not attempt to measure the effects of Biden’s spending plans. The University of Pennsylvania’s Penn-Wharton Budget Model did so, finding that Biden’s overall agenda would shrink the size of the economy slightly by 2030, and then increase it slightly by 2050.

Likewise, Moody’s economist Mark Zandi sees a short-term “marginal” drag from Biden’s tax hikes. But he says that would change quickly as infrastructure spending accelerates and creates 2.5 million new jobs in 2024-25.

Biden will rely on Yellen’s credibility – she garnered 84 Senate votes for confirmation to lead the Treasury after a widely hailed tenure as Federal Reserve chairman – to counter attacks on his tax agenda. His basic argument: Tax hikes and spending plans can only be accurately weighted when combined.

“Since the Reagan years, we have endured a particularly powerful economic ideology in this country – an ideology which says that tax cuts, as a rule, promote growth while government investment, as a rule, is a waste.” , she wrote by email. “This ideology has never made much sense given what we know about the fallout from government investments in people, infrastructure and R&D.”

Yellen concluded: “Right now we live in a time of imbalance between what our government takes in as revenue and what it should invest. The President’s proposals correct this imbalance and ensure that America can compete on the base. the skills of our workforce and the strength of our infrastructure instead of a race to the bottom of tax rates. “

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