US business groups have teamed up to form a coalition opposing tax increase proposals by the Biden administration. This has occurred following the decision to oppose the potential increase in tax rates which America plans on introducing to pay for the Biden Administrations ambitious infrastructure projects such as the green jobs deal, which would direct billions to initiatives such as charging stations for electric vehicles and eliminating lead water pipes. This green energy plan is predicted to create 10 million jobs according to Biden and is part of Biden’s larger infrastructure proposal which amounts to $2.3 trillion. This as a result has caused an alliance to be formed against the new tax proposals due to the government's budget deficit attempting to be mitigated, as businesses see investment as their main priority.
To allow this huge deficit of a projected $3.4 trillion in 2021, the US is increasing taxes such as corporation tax to account for this added loss. This will see further taxation on profits made by businesses and also tax the highest profiteers at the top of the market, allowing more government revenue to be obtained.
Ms Yellen told business leaders that corporation taxes in the US were at a "historic low", as businesses were encouraged to invest more into production and increase supply once again. However, the proposed hike would see them increased from 21% to 28%, quite a stark jump.
On the contrary, this will see a huge increase in revenue for the US government as there are more goods/services being made by American firms, therefore producing vast amounts of profits, in order to stabilize the budget account.
However, increased tax rates may be bad for businesses as well as the US government due to a concept known as the Laffer curve. This curve illustrates that, at the most fundamental level, there is an optimum taxation amount at which the government obtains maximum revenue/income, which can be shown below.
At point T*, this shows the optimum tax rate and revenue that can be achieved by a government at any given time. This is due to anything below T resulting in firms not paying hardly any tax to reduce the deficit, and anything above the optimum resulting in firms slowing down production. This is because taxation means firms have to cut costs in order to operate, therefore cut back on factor inputs such as labour, therefore leading to mass unemployment as well as a spiral of decline too.
Additionally, rising taxes means firms may leave their US headquarters to go to nations such as Northern Ireland where they can set up HQ to benefit from lower corporate tax rates. This will negatively impact the US as they are exposed to out-migration and inevitably see a loss in national income, and this is an example of leakages in the form of remittance, therefore increasing N.I GNI. This in turn will boost N.I aggregate demand, therefore closing the output gap, at the cost of the US economy.
This is another reason why firms are protesting the global tax rate minimum, as it prevents nations such as N.I to be internationally competitive by having low tax rates. This hinders the U.K nation to grow and enter the global stage, therefore limiting their development.
Overall, the Biden Administrations plans to continue with the increased taxation is a very risky scenario, in which out-migration and a loss of total revenue may be witnessed, which will detrimentally affect their economy. This means other strategies must be used concurring with this in order for it to be sustainable, and not just a short term goal for recovery.
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Written by Euan Taylor
Research by Hubert Kucharski.