There is a common saying, “don’t catch a falling knife.” Well, it appears Democrats in Tuesday night’s presidential primary debate did just that politically speaking. Despite the fact that 61% of Americans say they are better off than three years ago, the debate saw politicians promoting higher taxes with little regard to the economic impact those would have on an economy threatened by a spreading coronavirus outbreak. Could they have been more tone deaf?
Federal Reserve Vice Chair Richard Clarida said this week the coronavirus outbreak is “likely to have a noticeable impact on Chinese growth,” and “the disruption could spill over into the rest of the global economy.” On those fears, the Dow Jones Industrial Average has fallen into correction territory, and there are other troubling indicators. Among them, U.S. debt is again facing an inverted yield curve, when interest rates on long-term U.S. debt fall to below short-term debt, which historically predicts recession. There is a real possibility of an economic slowdown in the coming weeks, which also happens to correlate with the wrapping-up of the Democratic presidential primary. My submission for the candidates: jettison tax proposals that would exacerbate an economic downturn.
Financial prognosticators have been predicting a pullback in equity markets. It appears the COVID-19 virus spreading around the world may be a triggering event for broad economic disruptions. The market selloff this week certainly indicates a fear of supply chain disruptions, a freeze in travel hammering tourism, and the possibility of significant business loan defaults in China reverberating through financial markets. Yet, on the precipice of recession, Independent Vermont Sen. Bernie Sanders is still promoting his “wealth tax” that would claw $4.35 trillion out of the private sector for new government entitlements, reducing long-run GDP by 0.43 percent. Incidentally, this new tax doesn’t even begin to pay for all of his proposals.
Next is the swath of ideas to increase capital gains taxes. To pay for his health care plan, former Vice President Joe Biden would increase the top tax rate on long-term capital gains to 39.6 percent, up from the current top rate of 20 percent. Sanders’ top rate on capital gains would be 50 percent. Every other candidate on stage Tuesday proposes increasing taxes on investments. Maybe some voters would have been willing to stomach this when the stock market was at all-time highs, but that must be less appealing now.
National Economic Council Director Larry Kudlow on Tuesday pointed out that coronavirus fears won’t dominate the market forever, which is certainly true but there is still a lot of volatility to come. In this environment, everyone – particularly the business community — will be looking for certainty. This is perennially true when evaluating where to invest and grow your business and how to best allocate always-limited capital.
During tax reform I coauthored a piece explaining why it was critical the corporate tax rate land at 20 or 21 percent. At only 22 percent, “America would have a higher corporate tax rate than nearly three quarters of the OECD,” making the U.S. less attractive to international investment and vulnerable to home-grown businesses inverting overseas. Yet, every candidate on stage Tuesday has proposed elevating the corporate tax rate to somewhere between 25 and 35 percent. The Tax Foundation modeled the impacts of these proposals and each reduces economic output, wages, and employment. The most conservative plan, from Minnesota Sen. Amy Klobuchar, would reduce GDP by 0.5 percent, whereas Sanders’ plan would knock 3.8 percent off GDP and reduce full-time equivalent jobs by 755,000.
My intent is not to sling partisan mud or be alarmist, but with a slowdown pending now is not the time to handcuff oneself to policies that would do even more harm. Especially considering there aren’t many public policy dials left to lift the economy. The Federal Funds Rate is already historically low and the federal deficit will surpass $1 trillion this year, so there isn’t a lot of money for countercyclical spending, which leaves tax policy as the last option. Beijing has already announced tax cuts to help their businesses and individuals suffering from the crisis.
Which brings me back to calling on the candidates: distance yourselves from these tax hikes and embrace policies suited for long-term growth. Should the country face a national health crisis, voters will be alienated by ideas that would only exacerbate a global economic downturn.
Michael McHugh served as chief of staff for tax reform on the Presidential Transition Team, and was previously a tax aid to a member of the Senate Finance Committee. He is a partner at Urban Swirski & Associates. The views expressed herein are purely his own, and are not reflective the administration, his firm, or anyone else.