Joe Biden Chomping at the Bit to Raise Corporate Taxes
Presidential candidate Joe Biden’s enthusiasm for raising taxes may court favor with a lot of the electorate, but it’s only because few people know the real consequences of this.
With all the things that we teach kids in school, there definitely needs to be more focus on economics. We’re not talking about teaching them all that much about it, just some basic principles that will serve them well in life, especially by gaining a better understanding of what officials such as politicians and central bankers do, and how what they do affects us all.
Maybe one day they will become president, as young Joe Biden dreamt of during his college days, and if that happens, they want to understand at least the basics of economics. Biden was never much of a scholar but did get an undergraduate degree majoring in history and political science, and he did manage to make it through law school as well, although he found the study of law boring and barely managed to get his degree.
None of these subjects even touch on the topic of economics though, and you actually can go through school and get a couple of degrees and still understand very little about it. This should really trouble us given that he is now the favorite to be the CEO of the United States, where if successful, he’ll be in a position to have a huge impact on the economic well-being of the country and its residents.
It’s not just Joe that needs remedial help in economics, as his whole party could use a few basic lessons. It is not too much to expect that these politicians make informed decisions, and to do that, you have to be informed, and the alternative is uninformed decisions that may indeed put our well-being at significant risk.
Biden is certainly more moderate than some of the other candidates in the race for the Democratic nomination for president, particularly Elizabeth Warren and Bernie Sanders, both hard-core socialists. He’s still got a few punches that he’s anxious to deliver though, particularly his clear intention to undo Donald Trump’s corporate tax cut of 2017 and as well as the perennial desire of socialist politicians to raise minimum wages.
In an interview on Friday, Biden reaffirmed these intentions, and even called out Amazon for both not paying enough in taxes in his eyes and even for not paying their workers enough in his opinion, even though they comply with all laws and actually are paying their workers considerably more than the minimum wage these days.
These two issues are very polarizing politically, where if you are a Democrat, you’re for higher corporate taxes and higher minimum wages, and if you’re a Republican, you are against both. This involves much more than just political ideology though, as we need to examine what the consequences of these things would be, especially in these much more challenging times economically, where we have done a lot of damage to the economy from locking it down for so long and have to be particularly careful now not to throw too many additional punches.
Democrats are perceived to be more concerned with the people at the bottom of the heap, while many believe that Republicans favor those at the top. Republicans will tell you that helping the people at the top will trickle down all the way to the bottom, where Democrats believe that we should be helping those at the bottom more directly, and tax those who have more to look to equalize things and bring up the bottom lot.
At the top of the heap as far as Democrats go are the big corporations, and while they want wealthier people to pay more, corporations certainly should. Biden’s legal training should tell him that corporations aren’t actual entities but fictional ones, and you don’t tax fictional entities, as they can only pass it all down.
Even if it were the case that corporate taxation starts and ends with shareholders, and we believe that those with more should pay more in tax, taxing corporations does a terrible job of this because it places Amazon founder Jeff Bezos and his $150 billion in the same category as Joe Blow the plumber who is barely getting by and is doing his best to be able to retire one day without living in poverty, a goal he will never achieve anyway, but a fate that can certainly be made worse.
We never tax corporations per se, we tax people, and when we tax corporations, we tax a whole lot of people at once, and a whole lot more than just the shareholders. It does take a basic understanding of economics to figure out who this actually ends up affecting though, the sort of lessons that a future president needs to have a much better grasp of than he has shown, which is none.
A lot of people misunderstand the positive benefits of corporate tax cuts as well, thinking that this accomplishes much more than it ever could, taking us to a land of milk and honey that never comes.
Corporate taxation directly affects the cost of things, just like a sales tax does. Sales taxes are a lot more transparent to those who know little about these things, as you buy something, the tax gets added on, and you pay that much more.
Corporate taxes, in comparison, are hidden from view because this is included in the pre-tax price of the item, along with everything else that goes into providing the item, including a market-based profit margin.
Everything offered in the market has a supply and demand curve that applies to it, where if the price goes up, more people are willing to buy it but suppliers are less willing to produce it.
These Things Are Completely Decided by the Sum of the Economic Forces Involved
All demand curves have a point of equilibrium, where we reach a certain price based upon where supply and demand meet. Buyers are willing to pay $100 for a certain quantity, and sellers are willing to sell that much at that price, and we now have a market. We’ll say that this involves a million units at this price.
Part of what goes into the equation on the supply side is taxes. The current corporate tax rate is 15%, so we know that if not for this tax, the demand curve would shift to the left, meaning that the item could be sold in greater quantities at a lower price. This makes consumers happy because things cost less, it makes suppliers happy because they can make and sell more while still maintaining their margins.
Everyone benefits here but the government, with people being able to get more bang for their buck, as well as this creating more jobs as people need to be hired to produce the additional production that this shifting of the supply/demand curve caused. The government does need to get by on less, all things being equal, but they are free to replace this by raising taxes through other means, for instance by focusing on one’s ability to pay and not just looking to target everyone like corporate taxation ends up doing.
The effect of lower corporate taxes does not involve a trickle-down effect, like we see with things like reducing the highest rate of personal income tax does. The hope here is that wealthy folks will have more left after tax and will invest some of it in growing the economy, even though these people are well known for their hoarding. Some of this does trickle down though, in both directions, where benefits will trickle down to the rest of us with these tax cuts, by expanding the economy somewhat, and raising taxes will serve to contract the economy somewhat by reducing the flow of this trickle.
The gains and losses with corporate taxation doesn’t trickle down to the people, it instead pours down upon them, as they are primary participants in this particular scenario, the end ones in fact. Corporations, as well as other forms of business arrangements, are flow through mechanisms, where both costs and benefits to the business won’t just trickle down to the public, they will flow through the businesses directly upon the heads of the people.
Corporate tax hikes shift the supply/demand curve to the right, which is the wrong direction if we want efficiency and the right one if it’s economic contraction that we want. This tax gets added to the price as it must, as we only need to follow the curve to see that companies can no longer sell that much at the old price, they need to charge more. People don’t want to pay that much for this amount though, so we reach a new equilibrium where the price has gone up and the quantity sold has gone down, and we know that this will happen with certainty.
People need to spend more money on getting the same things, and given that their income hasn’t changed, this means settling for less for their money. Less production caused by this also means less people are needed to produce it, and instead of adding jobs like a corporate tax cut does, corporate tax hikes both eliminate jobs and make American businesses less competitive both overseas and at home.
We then may seek to address this loss of competitiveness by raising tariffs, which put the price of imported goods up accordingly and have the people spend even more to get the same things that they used to. The loss of jobs that results from all of this piles on additional contraction, where we see demand further reduced by this, decreasing production in turn.
While governments do need to raise money by way of taxation, corporate taxation is simply a terrible way to do it. The fact that this form of taxation exists at all is a millstone around our necks, although Trump did lighten it considerably by knocking it down from 35% to 15%.
Joe Biden at least doesn’t want to put it back to 35%, and only is looking to increase it to 28%, but this is like wanting to see the economy punched with just one fist instead of two. We can certainly be thankful that true radicals such as Warren or Sanders isn’t going to take a turn at this, where we’d be faced with the economy getting pounded with baseball bats, but an extra 13% in corporate tax will be a blow that we will all feel.
The biggest thing that is missed here by Democrats is that this really does involve a shift of the curve on the macro level as well as the micro level, due to these taxes applying universally. Companies compete against each other fiercely, in their efforts to maximize their profits, and all achieve a certain margin of profit. They don’t just decide that this profit thing is overrated and that they should just accept getting by with 13% less, perhaps even losing money in some cases, as this really all is determined in the market, as everything to do with a business is.
Swords are More Dangerous if You Don’t Know it’s a Sword You’re Swinging
There is a good reason why our good sells for $100 and not some other price, as this is where buyers and sellers come together. This willingness to sell at a given price already involves desired profit outcomes, and if companies were willing to accept even a little less profit, the supply curve would not be where it is now but would already be this much more favorable to consumers. They will accept less profit, but it won’t be voluntarily, it will be by way of selling less in the contracted business environment that higher corporate taxes visits upon us.
What corporate taxation does is move the supply curve by $13, where if they were selling 1 million units at $100, they will now be prepared to sell this million units at $113. If the demand for this was perfectly inelastic, meaning that people will pay any amount for it, the entire amount would be borne by the buyers, with the suppliers making the same amount of money and consumers paying the entire tax.
An inelastic demand curve wouldn’t be a curve though, it would be a vertical line, and while some goods are more elastic than others, meaning that price affects demand more, in the aggregate we do see a pretty substantial curve. What this does is to not only have consumers paying the entire tax, it also has them doing so while settling for less back.
There just isn’t anyone else that could possibly pay this tax other than end users, with the tax at the producer level being just another cost of production. The effect is an ironic one for a party that prides themselves on helping those less well off, as the pain of this economic contraction might be spread out to everyone but those with less have less that they can afford to lose.
If you slap a 13% tax on a family that is barely getting by on their income now, what they have to give up from such a tax will be more fundamental, involving things like food and shelter. The things that more well-off people need to give up ends up being considerably less impactful upon their lives, and they may not even miss the extra that this costs them due to already having such an abundance.
If we were looking to come up with a taxation scheme that places a greater burden not upon the rich but upon the poor, consumption taxes such as corporate and sales taxes are the perfect way to do it, and all under the guise of punishing these rich corporations. The people are made worse off but may not ever even be aware of what is going on, but the president certainly should be.
Biden is also a big fan of hiking the minimum wage, and this is another scheme that both harms the economy and disproportionately punishes the poorer segment of society. As long as we have free competition, the supply and demand curves of the labor market should reach equilibrium as well, and this also applies to the lowest wage jobs out there.
The supply curve for low wage labor is very inelastic at its lowest levels, which is why regions that have far less than completely competitive labor markets will see people accept wages far less than the lowest paid U.S. workers get, because this can come down to either take the extremely low wage or die.
We do have a floor with the U.S. market, provided by social assistance, and people aren’t going to accept less than what they could get for doing nothing. The U.S. also has minimum wage laws, although they only apply to legal workers and don’t include illegal immigrants, and when you hire illegal workers, you aren’t worried about the law because you are already flaunting it, often openly.
Many people, particularly Republicans, are opposed to illegal workers and want to do their best to keep them out of the country, without really thinking very much about the matter, like the Democrats do with corporate taxation. Superficial understanding of economic matters is not just the norm but is rampant.
These workers settle for the illegally low wage they get here because this is still more than they could earn back home, and even manage to send money back to their families in their home country even though their wages are so low.
This ends up shifting the supply/demand curve for a lot of things, especially with food, to the left, the side that we want and the one that has things costing less. Even if we can manage to get Americans to do all that picking under the hot sun, they will demand a lot more in wages for it and you can bet that these additional costs will find their way into the price of our food, because the cost of all inputs of production always do.
These workers make a substantial contribution to the American economy, and while many may feel that they should be paid a legal wage, this would end up depriving the American people of the efficiency these workers contribute and see them head home to their even lower paying jobs, the ones they risked much to flee.
When we put the minimum wage up, while this does raise the price of things, it does so in sectors that already pay people the minimum wage. We may dream of this making the lives of these workers significantly better, as they get back more than they give by paying more themselves, but because this does shift the demand curve for what they produce, it does the same thing to the labor market they are in.
Just like corporations aren’t going to decide they don’t need to make as much money, people aren’t just going to be able or willing to pay the same price for these things, because that’s just not how these things work in real life. The rise in price will result in demand being reduced accordingly.
This means less workers will be needed, and while the ones left will be making more, many will be left behind by this and be put out of work. It simply does not take as many workers to produce less, and this is all a matter of analysis and understanding, not debate. This also has ripple effects upon the economy in general which will add to the number of jobs lost by this plan.
Of the two, the corporate tax issue is a much bigger problem though since its reach is so much more extensive, but both of these initiatives will lead to more people out of work as well as our economy and ourselves being made worse off.
If people understood just this much, they would see Joe Biden as someone who wants to raise the price of everything, have us all settle for less, and put a bunch more people out of work in addition to the millions of people who were sent home from work and won’t have a job to return to once the quarantine is fully over.
The Republicans don’t really get this enough either, as if they did, they would look to do a lot better job to move people away from the idea that Biden is such a man of the people and that Trump is only interested in helping the fat cats and the stock market.
We can only hope that if Biden wins, and he is the clear favorite right now, he manages to learn enough about the implications of his ideas being put into action to avoid him causing even more damage to an economy that has been knocked to the mat already. His mistaken ideological beliefs run too deep though, so don’t count on it, and buckle up.
Economics is plenty important, and especially if you are looking to become the economic master of your country. The problem runs much deeper than Biden and his cohorts in the Democratic party, as if the electorate were more enlightened, if they knew what they were getting into, they would never vote for such a thing. They are clearly not, and should Biden win, they better be prepared to pay the price.
Chief Editor, MarketReview.com
Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.
Contact Ken: ken@marketreview.com
Areas of interest: News & updates from the Federal Reserve System, Investing, Commodities, Exchange Traded Funds & more.