Biden’s irresponsible ‘build back better’ regime risks raising inflation
Rising prices continue to erode Americans’ paychecks, supply chain issues are causing traffic jams at U.S. ports, and stores have bare shelves as Christmas approaches.
Worse yet, Transportation Secretary Pete Buttigieg has admitted that he expects supply-side problems to persist next year.
Meanwhile, the Biden administration’s top legislative priority, the so-called Build Back Better plan, is a patchwork of $ 3.5 trillion in taxes, warrants, job-killing regulations and rights to work. social assistance that will only exacerbate the supply problems plaguing the economy.
Fox News host Bret Baier asked Buttigieg why Democrats are prioritizing Build Back Better legislation amid the current supply chain crisis.
Buttigieg argued that the Build Back Better measure was part of the administration’s strategy to ease inflationary and supply-side pressures. “Part of what’s going on in our economy, part of what’s creating a lot of pressure right now, is the labor supply issues. These get better if, of course, we fight the pandemic and if we make life in this country easier and work pay off. “
If the administration expects Build Back Better to fix supply-side problems, it is misdiagnosing the cause. It’s hard to see how a trucker shortage and chaos at U.S. ports will be resolved with government grants, green energy giveaways, more regulations, and the biggest tax increase in generations.
The tax increases proposed in the Build Back Better bill would be the largest since 1968, when President Lyndon Johnson imposed a temporary income tax surtax on individuals and corporations. Inflation spiked in 1968 and 1969 while Johnson’s taxes were in effect.
On the other hand, President Ronald Reagan’s tax cuts in 1981, the largest since the advent of income tax, coincided with a fall in inflation from 10.3% to 3, 2% between 1981 and 1983. Sound monetary policy has played an essential role in the fight against inflation.
However, it is instructive that Reagan’s critics scoffed at his administration’s more modest projection that inflation would fall to 4.2% over a longer five-year period, from 1981 to 1986.
The Build Back Better legislation directs about three-quarters of its new taxes to businesses. Including state taxes, many businesses would face higher corporate tax rates than any of the 37 other Organization for Economic Co-operation and Development countries.
Such a large tax increase on American businesses would send shockwaves through the economy. Americans will pay higher prices for a smaller amount of goods and services.
Take the example of an American company that deals with supply chain issues. To strengthen its supply chain, the company could consider bringing production closer to U.S. consumers, keeping more inventory in expanded U.S. warehouses, or investing in new technology that reduces reliance on imports. Alternatively, the company may decide to expand into new foreign markets or simply delay major investments.
How would impending tax increases affect the company’s decision?
Company management would decide between these options based on a ROI analysis. If the expected after-tax profits are higher abroad, this is where the company will invest.
If new taxes – or the threat of new taxes – deter the company from producing more in the United States, it means fewer jobs in the United States, depressed wages, and less goods available to American consumers.
Likewise, if new taxes dissuade the company from having more inventory, the amount of goods available to American consumers will decrease and prices will rise.
Technology investments would be particularly risky for the company. Many ideas fail to turn into business success no matter how much money is invested in them. If the business faces all the downside risks, but taxes claim more than half of the upside reward, the business has good reason not to invest in new technology.
The same is true for small entrepreneurs.
Technological innovation is at the origin of almost all of the improvement in the material standard of living of populations. Due to business and entrepreneurial innovation, most Americans today can afford things that could not be bought at any price at the turn of the 20th century, such as air conditioning, modern medicine, and advanced portable computing. .
Higher taxes on entrepreneurs will stifle innovation, leaving Americans to pay more for lower quality products.
Perversely, the mere threat of a tax rate hike can cause some US companies to postpone capital investments until after 2021. By deferring certain expenses, companies can recognize more of their taxable income before. the expected increase in tax rates next year. This may contribute to weak business investment until the end of the Christmas shopping season.
While there are factors at work besides taxes, it’s worth noting that domestic business net investment fell 23% between the fourth quarter of 2020 and the second quarter of 2021.
How much upward pressure is the Build Back Better plan exerting on prices? It depends on the amount of distortion spending and new regulations remaining in the final package.
For their part, left-wing Democrats in Congress are pushing for enough new government spending and regulations to permanently reshape the role of government in the lives of Americans.
Instead of negotiating with more moderate Democrats to reduce what’s included in the bill, some on the left are advocating keeping all proposals intact, but funding them for fewer years.
They expect that if Republicans take over Congress and the White House, they won’t have the political will to reclaim new rights.
This argument exposes the budget gadgets already at work in the bill. While taxes are accrued over the 10-year period from 2022 to 2031, most social safety net provisions are not funded until 2025. Even now, the Build Better social protection program relies on spending large deficits to make the calculations work.
By recklessly increasing the deficit, Build Back Better would push America closer to our large and growing national debt.
When debts and deficits get out of hand, creditors worry and ultimately demand a higher return for the risk they bear. This means that interest rates will tend to rise unless the Federal Reserve doubles down on measures that risk future inflation, such as buying back its own securities.
With nearly $ 29 trillion in debt, even a 1 percentage point increase in interest rates means billions of dollars more in interest owed every decade. Unless lawmakers and the Federal Reserve learn restraint, they risk putting the nation in a vicious cycle of increased debt, higher interest rates and soaring inflation.
The United States cannot afford to let deficit spending unchecked, and it cannot afford the higher prices that are hidden in the Liberals’ massive tax and spending plan.
This piece originally appeared in The Daily Signal