By Karen Hube
Oct. 26, 2020
While political rivals are forecasting economic devastation if former Vice President Joe Biden were to raise taxes on the wealthy and corporations, many economists and tax analysts who have modeled outcomes have a different take.
The net effect of Biden’s proposals, when analyzed independently of spending and economic policies, would be negative economic growth ranging from -0.16% to -1.62% over the next 10 years, according to analyses by the American Enterprise Institute and Tax Foundation.
Slowed growth is attributed to higher taxes on the very wealthy, and major changes to businesses taxation, including an increase in the corporate tax rate from 21% to 28%, a doubling of the tax rate on certain income earned by foreign subsidiaries of U.S. corporations, and elimination of a 20% deduction for owners of pass-through entities with income of more than $400,000.
But when factoring in spending and economic plans—including those for trade, immigration, education, housing, health care, and other policies—the outlook varies by scenario.
An analysis by Moody’s Analytics finds that if Biden wins and Democrats win a majority in both the Senate and the House and enact his plans, average annual economic growth would be 2.9% and average annual wage growth would be 0.9% through 2030.
Moody’s finds that some 18.6 million jobs would be created over Biden’s four-year term, and full employment would be reached in the second half of 2022. Full employment is typically defined as an unemployment rate under 5%. It is about 8% today.
In contrast, if President Donald Trump wins the election and Republicans win the majority in both houses of Congress, the economic picture dims: 10-year economic growth would average 2.4%, wages would grow by 0.7% over a decade, 11.2 million jobs would be created over four years, and full employment would be reached in 2024.
If Congress maintains its split majority, with Republicans dominating the Senate and the Democrats in the House, the economic outcomes will be similar whether Biden’s or Trump’s tax policies are in effect—though somewhat more favorable under Biden’s presidency, according to Moody’s.
Analyses that compare the two candidates’ plans are handicapped by a lack of detail issued by Trump. For example, while he has stated that he supports a capital-gains tax cut, none of the analyses factor this in.
Generally speaking, however, capital-gains tax cuts don’t typically help the economy, says Garrett Watson, a senior policy analyst at the Tax Foundation. “There is no evidence that capital-gains tax cuts are growth-enhancing.”
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