- - Wednesday, May 12, 2021

President Biden’s taxes may be great politics but are lousy economics.

He would fund pre-K education, free community colleges and child allowances by boosting taxes on corporations and the ordinary incomes and capital gains of the top one percent. Those strategies appeal to minorities and suburban women vital to the Democratic base but are jobs killers.

Mr. Biden would raise the federal corporate tax from its current 21 to 28%. Combined with higher rates on personal income for those earning more than $400,00 and state levies, those changes would raise the taxes on profits distributed as dividends from 47.5 to about 62.7%.

Taxes that high on profits would significantly reduce the after-tax payouts from IRAs and other retirement savings for seniors, and encourage businesses to take manufacturing offshore, perform backroom services in India and similar places and move R&D and patents abroad.

Mr. Biden would raise the tax rate on capital gains for those earning more than $1,000,000 from 24.8% to 43.4%. Adding state levies in California and New York City, the overall bite would jump to at least 53%.

Prices on stocks held for 10 years reflect an 18% loss from inflation, raising the top real rate on capital gains in the Golden State and the Big Apple to at least 70%.

For family businesses, the inflation bite would be even larger, and Mr. Biden wants to both tax capital gains at death and levy the estate tax. That would impose a death tax on many businesses of more than 70%.

Those taxes would force the sale of car dealerships, general contractors and other decent-sized businesses, because families can’t buy enough life insurance on the founder to handle it all. After factoring in inflation, children would be left with paltry sums, without jobs in family enterprises and left wondering why mom and dad worked so hard to build a legacy.

In the high-tech sector, venture capitalists gamble on startups promising to solve tough engineering problems. They accomplish big payouts that are taxed at preferential capital gains rates through an initial public offering or by selling out to a behemoth like Google, Apple or General Motors.

Entrepreneurs are good at spotting consumer interests and solving tough design problems. They lack Elon Musk’s flair for marketing or Tim Cook’s skills at government-business and international diplomacy but higher capital gains taxes would create a lock-in effect.

Founders would hold onto their businesses longer than their broader management skills warrant. At once, that would lower the value of startups to venture capitalists, slow the dissemination of new technologies through the U.S. economy and penetration into foreign markets, and limit their overall contribution to U.S. productivity growth, wages and international competitiveness.

The U.S. economy is increasingly reliant on those high-tech entrepreneurs to drive the modernization of traditional manufacturing like autos, create whole new industries like collaboration software and power the virtual workplace. 

Mr. Biden’s capital gains taxes would kill many American inventions in the cradle and send startups looking for funding in China and innovation friendly countries in Europe like the Netherlands, Switzerland, Germany and the U.K.

Simply, Mr. Biden’s corporate and capital gains taxes would stifle employment and hammer down wages both for high-tech employees and more ordinary services workers in metropolitan San Francisco, New York, Boston and other major cities.

State and municipal revenue bases would decay. Vital public services would be difficult to fund in those core cities, creating more crime, poorly performing schools and a host of other social problems we usually associate with crowded Third World countries.

If you think that’s not possible in America, consider the looting and riots fanned by progressive groups like Black Lives Matters in major cities last summer and by right-wing groups on the National Mall Jan. 6.

Progressive policy wonks that populate the Biden administration and promote it in the media read from a peculiar book of economics. They campaign for a carbon tax — after all raising the price of carbon will cause Americans to create less of it. But raising the price of capital will have no impact on risking taking or investment?

For progressive economists, the laws of supply and demand only apply when convenient to their socialist impulses.

On the whole, Mr. Biden’s taxes are a direct assault on manufacturing and high tech and will steal bread from the mouths of minorities in our cities and middle-class suburbanites — but he is duping those voters with free stuff paid for with taxes on millionaires.

• Peter Morici, @pmorici1, is an economist and emeritus business professor at the University of Maryland, and a national columnist.

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