FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
March 14, 2023

IN THIS ISSUE:

1. Biden Budget Loaded With New Taxes & Spending

2. All The President’s Proposed Tax Increases

3. Increased Tax Revenue Offset By More Spending

4. Americans Participating In Fewer & Fewer Surveys

Overview – Biden Budget Loaded With New Taxes & Spending

Last week President Biden released his federal budget proposal for fiscal year 2024, which begins on October 1^st, and it is chock full of new income taxes and other taxes – and big new spending, of course.

When presidents submit these annual federal budget proposals to Congress each year, they also include projections for taxing and spending over the next 10 years – even though they won’t be in office that long.

Mr. Biden’s budget proposal would include $4.7 trillion in new income taxes over the next 10 years but would still increase our national debt by $17 trillion over that period. Fortunately, this new budget has little to no chance of passing because much of it was rejected in the last Congress with Democrat majorities and has no chance now with the GOP in control of the House.

The Wall Street Journal, among others, reported the details of the president’s 2024 budget and 10-year projections over the weekend, and I’ll summarize them for you below.

All The President’s Proposed Tax Increases

The press is reporting that President Biden’s FY2024 budget proposal released Thursday would cut the deficit by $3 trillion over 10 years. To do so, the plan would raise income taxes by nearly $4.7 trillion and would increase revenue and spending to unprecedented levels.

The President’s record large $6.89 trillion budget proposal is a political document that sets up his re-election campaign. While the budget has virtually no chance of passing, it shows where Mr. Biden wants to take the country if he wins a second term. Liberals are applauding.

Let’s start with the tax increases that far exceed even those that passed last year in the Inflation Reduction Act:

•A New “Wealth Tax.” The budget exhumes the wealth tax that Senate Democrats proposed to pay for the President’s “Build Back Better” plan. It proposes a 25% minimum tax on the “full income” of Americans with more than $100 million in wealth, by which it means taxing the increase in the value of assets even if no income is realized.

•Personal Income & Capital Gains Tax Hikes. Mr. Biden wants to tax capital gains at the same rate as ordinary wage income for those making more than $1 million. This would effectively double the current 20% tax rate on capital gains since he also wants to raise the top rate on personal income over $400,000 to 39.6% from 37%. But wait—it gets even worse.

•Surtax On The Surtax. The budget extends the 3.8% surtax currently applied on investment income of couples making more than $250,000. It also raises this rate and the top Medicare payroll tax on wages to 5% for those earning more than $400,000. This 44.6% top marginal rate would hit business, investment and wage income.

Add state taxes, and many high earners would pay a combined top rate of more than 55%. This is higher than in the U.K. (45%), Germany (47.5%), Spain (54%) and even Sweden (52.3%). Is he trying to beat Europe in a race to the tax top?

Capital gains are currently taxed at a lower rate than wage income in part because they are eroded by inflation, and higher rates discourage people from selling stock and realizing income. Even liberal economists agree there are diminishing returns on capital-gains taxes once the rate exceeds 28%. Thus, Mr. Biden’s proposed tax increase could actually reduce revenue for the Treasury.

•Corporate Rate Increases. The budget raises the corporate income tax rate to 28% from 21%, and the minimum rate on the foreign earnings of US multinationals to 21% from 10.5%. This comes on top of the new 15% minimum tax on book income of corporations with more than $1 billion profit.

Last year corporations started having to amortize their research and developing expenses over five years instead of deducting them immediately. In addition, a provision in the 2017 tax reform allowing immediate 100% capital expensing is also starting to phase out this year.

All of this will raise the cost of investing and the effective federal corporate rate to well above 28% for many companies and higher than before the 2017 tax reform that finally ended the flight of US companies overseas. Add the average state corporate rate of 6%, and US companies will be at a large global disadvantage.

•4% Stock Buyback Tax. Mr. Biden didn’t waste time adding a 1% tax on corporate stock buybacks, quadrupling it a year later. The higher rate will interfere with business decisions on where to invest their capital with damaging impact on growth.

•Miscellaneous. The budget includes sundry smaller tax changes to raise hundreds of billions of more dollars such as “repeal the deduction for foreign-derived intangible income,” “restrict deductions of excessive interest of members of financial reporting groups,” “modify tax rule for dual capacity taxpayers,” and “strengthen limitation on losses for noncorporate taxpayers.”

Increased Tax Revenue Offset By More Spending

All of these tax increases are projected to raise revenue as a share of GDP to a new higher level of 20.1% of GDP by 2033, which is far above the 50-year average of 17.4%. One reason the tax share isn’t even higher is because the tax hikes would be offset by spending increases via the tax code such as a $3,600 refundable child tax credit and making the sweetened Affordable Care Act premium subsidies permanent.

Meanwhile, spending would climb to 25.2% of GDP, compared to a 50-year average of 21%. That’s mostly owing to rising interest costs on federal debt and Mr. Biden’s proposals for a cavalcade of entitlements such as universal pre-K, childcare, paid family leave and housing.

Even with all the new taxes, deficits over the next decade would total $17 trillion, and debt held by the public as a share of GDP would rise to 109.8% by 2033 from 97% last year.

The bottom line is Mr. Biden’s budget is a recipe for an economically and militarily weaker America.

Finally, as noted earlier, I don’t know why President Biden is submitting these new tax and spend proposals when he knows they have no chance of passing. All I can figure is he is sending a message to his liberal base of what he’d like to do if elected to a second term.

Unfortunately, intentions are more important than what you actually accomplish in the eyes of many liberals today. In fairness, there are probably Republicans who feel the same way. In any event, this is where we find ourselves in America today.

Americans Participating In Fewer & Fewer Surveys

Many businesses small and large rely on surveys of consumers to assist them in determining what products and services to offer and just as important, how to sell those goods to their target audiences. So, these surveys can be very important.

Yet in recent years, the number of Americans willing to participate in these consumer surveys has declined significantly. Some survey response rates are down 50% or more in recent years. Researchers are not exactly sure why.

Key economic indicators that help experts gauge the health of the US economy often rely on survey responses from businesses and consumers. But if response rates falter, does that economic data begin to risk its validity? Maybe.

There are many surveys conducted across different industries and business sectors, in addition to surveys among consumers. Today, we’ll look at what’s happening in one of the most widely followed surveys, the Job Openings and Labor Turnover Survey (JOLTS) conducted by the Labor Department where response rates have fallen significantly – and that has economists worried.

The JOLTS report helps measure job vacancies. It collects data from employers about their businesses' employment, job openings, recruitment, hires and separations. JOLTS defines Job Openings as all positions that are open (not filled) on the last business day of the month.

Historically, the response rate to this survey was above 60%. In the fall of 2017, the response rate for this survey was around 64%. But if you fast forward five years later, the response rate has dropped to less than half of that at just under 31% – which obviously is an enormous decline. The question is, why?

Researchers looking into this trend have concluded that Americans are suffering from “survey fatigue.” When you look around, there’s a survey at the end of every customer service call and at the bottom of your receipts. The researchers say Americans have increasingly grown tired of completing surveys.

In my own case, I can say this is definitely true. Ditto for friends and family I have asked about it.

The other question is, what happens if survey response rates continue to fall? Will their results become invalid and thus widely ignored? It’s certainly possible.

It will be interesting to see what happens with this trend and what government and businesses do to try to deal with it. In any event, we’ve seen a dramatic decrease in the percentage of Americans willing to participate in surveys.

Time will tell how this plays out.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Biden’s $6.8 Trillion Budget Raises Taxes On High Income Earners

Biden Budget Would Lower Deficits, But Only By New Income Taxes

Survey Responses Down Since Covid

Gary's Between the Lines column:
Biden Wants Tax Hike On High Earners To Keep Medicare Solvent

 

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