By Preston Brashers
The Heritage Foundation
The stagflation is here. Inflation hit a new 40-year high of 9.1% in June, and the economy contracted in the first and second quarters of the year.
Yet Sen. Joe Manchin, DW.Va., and Senate Majority Leader Chuck Schumer, DN.Y., are launching a plan to impose more taxes on businesses and individuals. While there is no good time to raise taxes, doing so in a down economy would be particularly counterproductive.
It’s a disappointing about-face from Manchin, who only weeks ago dismissed the idea of raising taxes on Americans without seeing the data that showed falling inflation.
On July 15, Manchin told West Virginia radio host Hoppy Kercheval, “Inflation is absolutely killing many, many people…Can’t we wait to make sure we don’t do anything to add to that?” ? And I can’t make this decision on taxes of any type [without seeing a drop in inflation].”
The new taxes in the 725-page Manchin-Schumer bill fall into three main categories: new taxes on businesses designed to increase revenue, punitive taxes on businesses designed to coerce, and an $80 billion expansion of the IRS intended primarily to strengthen enforcement and audits on US taxpayers.
The biggest tax hike that would boost revenue would be a new minimum business tax, which is expected to raise $313 billion over 10 years. The corporate minimum tax would force companies to calculate their tax liability under a complex parallel tax system based on income from financial statements.
But don’t assume you won’t be affected if you’re not a business owner. This tax hike, of course, increases business costs both directly and indirectly by placing a heavy compliance burden on businesses, most of which ultimately comes back in the form of lower wages and higher prices.
In the Medicare prescription drug market, the Manchin-Schumer bill uses effective tax rates of more than 100% for drug manufacturers as part of the enforcement mechanism for government drug pricing programs. medications. Controlling drug prices would shift costs, but not reduce inflation. Indeed, although the price of the 10 to 20 drugs that are price controlled may fall specifically on the Medicare market, some estimates indicate that price controls will cause far fewer drugs to enter US markets.
Life-saving drugs would not be available at any price. How’s that for stagflation?
The Manchin-Schumer bill also makes a round of grabbing more taxes without (another) increase in direct taxes. By adding about 87,000 new agents to the ranks of the IRS, the senators hope to collect a total of about $200 billion in additional tax revenue from Americans through about 1.2 million additional annual audits. Nearly half of this additional revenue collected would go directly to the IRS.
Again, this does not help end stagflation. Having hundreds of thousands more people work for the IRS or go through an audit in any given year will not free up the private sector to start producing again. As a general rule, US policymakers avoid raising taxes in a declining economy. When they’ve tried it in the past, it’s failed.
The most egregious example of tax hoarding during a recession followed the stock market crash of 1929. At least four major tax increases in the 1930s – the Smoot-Hawley tariffs of 1930, the large personal taxes of 1932, the “Soak the Rich” tax of 1935 and the introduction of the payroll tax in 1937 – helped to deepen and prolong the Great Depression.
While another Great Depression is unlikely, Schumer and Manchin’s $1 trillion tax plan may well push the economy deeper into recession. It would be devastating for American families, but it would also be terrible news for the fiscal situation in the United States, with the national debt already at $30.5 trillion.
After President George HW Bush broke his promise of “no new taxes” in 1990 at the start of a recession, it not only made the recession worse, it failed to raise federal revenue as expected. In 1992, tax revenues fell to their lowest level as a percentage of GDP at any time between 1985 and 2002.
Each of the last 12 U.S. recessions dating back to 1949 has resulted in lower federal tax revenue growth. Declining economic output reduces Americans’ income and pushes them into lower tax brackets. Since high-income Americans pay significantly more taxes than low-income Americans, healthy economic growth is essential to growing tax revenues.
Manchin was right the first time. More taxes are not what America needs right now.
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