Surprising spending without limits for the US government. The current US government seems to have an agenda of spending without any limit and believing that there are or will not be any adverse consequence for them or the US economy as a whole or its US entrepreneurial culture or the country’s long term political stability.

More Spending

The current government are planning three massive spending bills, totaling over $6 trillion, over the next ten years.

These bills are as follows:

1. A $1.9 trillion spending bill associated with Covid relief which has already been passed in 2021.
2. A $1.2 trillion infrastructure bill which has been proposed and is now being negotiated by the political parties in the US Senate and then agreed with the US House of representatives. There are issues with how much of this is actually infrastructure spending and how much is spending on other things which is being piggybacked onto an “infrastructure” bill.
3. A $3.5 trillion of further spending on top of the spending on 1 & 2 above on a wide range of issues.
4. These spending plans come on top of a $3.6 trillion package approved last year by the previous administration for Covid pandemic relief.

These four bills amount to $10.2 trillion of additional spending or the equivalent of 50% of the US GDP or three time the amount on tax collected by the federal government in 2020.

The three 2021 bills of the current administration alone would spend about 25.6 percent of America’s economic output. This is a cost not imposed on Americans since World War II when the focus was on war production and winning the war against Germany and Japan. There is no equivalent goal today. Instead, it appears that the only goal is to make this scale of spending the new normal. So, $6 trillion pa is to become the new normal throughout the next four or eight years depending on the result of the 2024 election.

This is the Biden government’s plan: a dramatic increase in government spending from the average of the last ten years of between 21.2% to 24.5% of the nation’s income, and a hike in taxes on investment, business income on both individuals and businesses.

However, notwithstanding the future elections results, history tells us that once enacted spending becomes permanent and is almost impossible to reverse.

Taxing Everything

In order to pay for this $6 trillion pa spending plans the government is planning to raise taxes by $3.6 trillion. In order to achieve this level of tax, which is lower than the $6 trillion spending plan, and with current spending already exceeding the current tax income take before this additional spending was planned.

1. The government is planning to increase the capital gains tax to 40.8 percent, twice China’s and the highest since Jimmy Carter in 1977. However, in order to be liable for capital gains tax you have to make a capital gain in the first place there is often a choice when a capital gain arises since a taxpayer can defer selling an asset until there is a more favourable tax regime. So, there is no guarantee that the gains will occur which will require capital gains tax to be paid. This is likely to reduce the expected tax take.

2. They would also like to increase the federal corporate income tax from 21 percent to 28 percent. Given that the average state and local corporate income tax is roughly 6 percent (and fully deductible from federal income taxes), most businesses will be hit with a marginal combined corporate tax of 33%, ten points above the European average of 23.5% and eight points higher than communist China. Avoiding this tax increase may be difficult but there will be some companies who decide to leave their money overseas or who see the need or opportunity to make larger provisions in their financial accounts which will reduce their taxable income and their consequent tax liability.

3. There are plans to take away the “step up in basis,” a hundred-year-old feature of the U.S. tax code designed to protect family farms and small businesses from being crushed by taxes at the end of each generation. Today, as for the past hundred years, when parents died, the children would assume the farm/business with a cost basis at the time of death. They would notpay capital gains taxes on the increased value (greatly augmented by inflation) of the family business during their parents’ lifetime. This would not only punish family owned businesses but could also reduce the profitability of these businesses in the run up to a sale or transfer within the family since it would be in the interests of the family to reduce the value of the business in order to reduce the tax liability a transfer to the next generation and make it more affordable. So Biden’s government would remove this long-standing protection and force every generation to pay capital gains (now 40 percent rather than 23.8 percent). How is the family business to pay such taxes? Go into debt? Sell the farm? Or employ creative accountants to reduce the tax liability to manageable levels.

4. It is worth noting that this repeal of the “step up in basis” in 1976, was so unworkable it was never implemented and was formally repealed before the presidential election in 1980.

5. The US government also plans to hire 87,000 more IRS agents as part of an $80 billion increase to the agency’s budget in order to squeeze more money from current taxpayers. The promise is that spending $80 billion on the IRS will drag in an additional $787 billion in tax dollars over ten years. Previous budgets have given less optimistic estimates of how much an additional IRS agent can bring in. It is worth noting that every time that governments have claimed to squeeze more money from tax avoiders that they have always fallen short Are their billions in unpaid taxes to be collected?

This assertion is the magic wand repeatedly waved by all governments to justify more spending on IRS agents. However, the projected revenues from more “enforcement” never materialize and there is no reason to believe that this time will be different.

It should be noted that no new taxes have been raised at the national level except during the four years of united Democrat control with Clinton in 1992–94 and Obama in 2008–10. A Democrat Party dependent on more government employment and increased welfare dependency for votes is terrorized and weakened politically by a Republican Party popular for consistently opposing tax hikes, and government funding for Democrat activists requires the tax increases that Republican control denies them.

Electoral Consequences

The impact of higher spending and taxes on the next two elections is likely based on historical experience for the balance in the US Congress to change hands as it is unlikely that those paying taxes these new higher taxes will vote for the current party in government. Experience shows that people are in favour of higher taxes to fund public spending as long as they do not have to pay higher taxes themselves. If they believe that they will have to actually pay higher taxes, then they usually vote for the party offering to charge the lowest tax levels. This is what has happened before over the last 25+ years.

 The current Government believes that by creating what they hope will be a new collection of dependent classes that will allow them to buy enough “dependency votes” to win in 2022 and 2024. Each of the three spending bills is designed to create more government employees whose gold-plated salaries and promised pensions will encourage them to vote in their self-interest as tax-eaters, not taxpayers. At every turn the spending is designed to create only unionized jobs and/or government jobs. 

The tax hikes are designed to reduce private-sector jobs and wages and eliminate most independent contractors and small businessmen, who generally view their income as created by their own hard work and may therefore not vote for the current government in 2022 or 2024. In the UK this was a policy pursued by New Labour under Gordon Brown’s chancellorship. However, he did not win the 2010 election but did manage to deny David Cameron’s Conservatives an absolute majority. He might have considered that a demonstration of the success of his approach except that Labour went on to lose the elections in 2015, 2017 and 2019. The memory of the 1997-2010 Labour government’s welfare largess has not succeeded in creating permanent support for Labour at subsequent elections. I admit that there is not a direct correlation between the US and UK electoral experience except perhaps that no one really likes paying taxes.

Rewriting Labour Law and throwing more sand in the gears of American Capitalism

First, the governments supporters in the US Congress, House and Senate, have demonstrated almost unanimous support for the Protecting the Right to Organise Act (PRO Act), a significant rewriting of U.S. labour law that begins by eliminating laws in 27 of the 50 US states that allow workers to say “thank you, but no” to being forced to join a union and pay dues or fees. The law, if enacted, is likely to outlawed most independent contractors, prohibiting them from being their own bosses and forcing them to work as employees so they can be dragooned into a union and have dues extracted. However, it is part of the American way that the majority of Americans want to be their own boss rather than working for someone else.

This change in labour relations will make the cost of doing business in the US much higher and should make it harder to bring work back from overseas where workers are looked after by totalitarian regimes where they have no rights except to obey the government. This deliberate throwing of sand into the gears of the US capitalist economy will reduce profits and the consequent tax payments from the corporate sector and will therefore increase the budget deficit still further.

Labour Unions once forced 35% of the American workforce to pay them dues. But unions, like any parasite, weaken their host, and over time unionized firms and industries declined. Today only 6.3 percent of the private sector is unionized. This type of class warfare does not work well when 53 percent of American households have an Individual Retirement Account (IRA), whose performance is dependent on the engine of American Capitalism, the provision of a comfortable retirement. Unions are less attractive when sixty million Americans work at least in part as independent contractors, and they then see their nest egg being decimated by government largess to the public sector.

Conclusion

The spending plans will face a difficult time passing the US senate give its current 50:50 split. The tax increases if enacted will bring in much less that the amounts promised by the Government and the regulatory changes will reduce the efficiency of American Capitalism but will not destroy it. The consequences of these proposals is most likely to be an increase in the Us debt level and higher inflation.