The dramatic economic decline due to the Covid-19 crisis and the unprecedented recovery spending plans approved by President Trump will drive the fiscal 2020 United States budget deficit to a record $3.8 trillion, or 18.7% of U.S. gross domestic product, according to the Committee for a Responsible Federal Budget (CRFB). According to the same estimates, the fiscal 2021 deficit would reach $2.1 trillion in 2021, and average $1.3 trillion through 2025 as the economy recovers from the impact of the forced shutdowns.
To finance this staggering fiscal effort, the Democratic Party leader, Joe Biden, is announcing a massive tax hike that will neither help the economy nor reduce the deficit.
The solution to the United States budget deficit is not more taxes. Even in the most optimistic receipt scenario, there is no tax hike program that would even start to address the structural deficit, estimated at one trillion dollars a year, even less with the above-mentioned estimates.
More taxes will hurt the recovery, damage the job improvement potential, and reduce investment in the economy. More taxes mean less growth and no deficit improvement.
The Obama administration learnt this lesson quickly, and extended the Bush tax cuts in 2020, adding a new tax cut in 2013. Other United States misguided tax hikes in 2013 did nothing to reduce the debt and kept the economic and job growth below potential.
A wealth tax, often repeated by the most extreme politicians in America, would not only provide exceedingly small revenues for the Treasury, it would generate more negatives than any improvement in tax receipts. There is a reason why almost every European nation has abandoned the wealth tax. The receipts are negligible and the negative impact on investment, attraction of capital and job creation outweigh any revenue increase. The wealth tax revenue relative to GDP in the countries where it exists range between 0.07% in Finland to 0.22% in France. There is no way that a wealth tax would collect 1.4% of GDP as Senator Warren estimated. A wealth tax in the United States would make no visible reduction in the existing deficit, let alone finance the trillions in entitlement spending that Biden has announced.