This Month’s Newsletter

Just What Problem Are We Trying To Solve? Join our Monthly Newsletter December 2020

Mark R. Hoffman

CEO, Principal

Last month, my partner Trip Beaver wrote about Federal tax increases and the overhanging debt bomb in the US. For sure, record Federal tax expenditures must be paid for by something, and there are only two options: taxes and/or debt. Trip outlined the potential sources of tax increases under president-elect Joe Biden’s plan. We hope that got everyone thinking. Can those planned increases help solve our problem? I guess that depends on what problem you’re trying to solve.

To understand the implications of Biden’s proposed plan, I went to the most impartial source I could find: The Tax Foundation. The Tax Foundation is a non-profit started in 1937 with a mission to “educate taxpayers about sound tax policy and the size of the tax burden borne by Americans.” Of all the analysis and data that is published by the Foundation, I found myself focused in on two data tables. The first shows the distributional effect on after-tax income levels of Biden’s tax plan – by income group:

The second shows the economic effect of the plan (long-run change in GDP) – by provision and in total:

There is a lot to unpack here. I could make 100 observations, but instead I’ll make just four:

In the short-term (2021), Biden’s tax plan will increase after-tax income levels for the bottom 90% of earners in the US and decrease after-tax income levels for the top 10%. By far the largest increase in income levels would be the lowest earning quintile. I asked earlier, will this help solve our problems? If the problem you’re trying to solve is income inequality, this plan certainly aims to do that by increasing the tax burden in the upper income brackets and decreasing it in the lower brackets.
One of the effects of the proposed changes is that overall after-tax income levels will decrease 1.2% in the short-term and 1.9% in the long-term. (I’m using the “Conventional” column data not the “Dynamic,” as the Dynamic view incorporates a heavy dose of assumptions and judgement).
The short-term income increases at the lower end of the range fade over time as some of Biden’s programs expire (primarily driven by the temporary expansion of the Child Tax Credit provision). And in fact, the 2030 change at all ranges of income is negative.
Finally, on the second table, I cannot help but observe the negative effect on long-term GDP of each of the provisions listed. Taken in total, The Tax Foundation estimates that these tax revisions would decrease US GDP by 1.62% per year. That is a huge percentage of the total desired (and required) GDP growth rate of 2%+. I don’t pretend to have all the answers, but I do know that if our spending is outpacing our tax receipts, the only way to solve the problem is through growth. And saddling that growth (that isn’t what it used to be) with an additional 1.62% burden/year is going to make things very, very difficult.

Sadly, there are no easy answers here. But what I observe in this tax plan looks like the rebound in the US economy is going to take a while. Maybe a long while.

Mark is a co-founder of Lanier Asset Management and serves as its Chief Executive Officer. Prior to founding Lanier, he was a partner at The Boston Consulting Group. Mark is an honors graduate of The University of North Carolina at Chapel Hill with a BA in Economics, and holds an MBA from The Harvard Business School.