‘Build Back Better’ Would Sink the Labor Market

The two sides of a coin are typically regarded as opposites. In the case of President Biden’s $5 trillion Build Back Better bill, the two sides are actually the same. Both the revenue and expenditure provisions of this agenda will cause substantial decreases in employment. The only difference will be how.

The Build Back Better bill would deliver a double blow to an already disrupted labor market. Most of the explicit tax increases in the agenda directly disincentivize investment, which reduces capital, wealth, wages and employment. Meanwhile, the creation of new (and the expansion of existing) employment-tested and income-tested benefits would increase the implicit tax on working.

The tax increases on both corporate and pass-through business income would reduce wage growth by shifting investment out of the business sector, reducing competition and overall investment, and contributing to lower employment. The tax increases on capital gains, as well as increased corporate taxes on foreign profits, would exacerbate these effects.

The expansion of Affordable Care Act subsidies and paid medical-leave mandates would also reduce employment levels by tying benefits to not working. This and other provisions are gifts to unions, helping them achieve the goal of higher wages through reduced labor supply.

The bill would expand the child tax credit for households that earn no income for a full calendar year. Perhaps the bill’s authors are too young to remember the 1996 welfare-reform law, which demonstrated how sensitive single mothers’ work behaviors are to such disincentives.

Additional subsidies for food, along with medical coverage and housing, decrease as a household earns more income, providing more disincentive for working. The implicit employment and income taxes from a total of 13 such measures would add almost eight percentage points to the marginal tax rate on labor income. Other parts of the bill further reduce the purchasing power of wages by educing competition and raising costs in telecommunications, energy and other products and services, increasing prices in those industries.

After separately estimating the effects of Mr. Biden’s tax hikes, we find large costs to the supply side of the economy. One of us (Mr. Ginn), along with Steve Moore and E.J. Antoni, finds that the explicit tax increases on income, investment and wealth will cost five million jobs over a decade compared to baseline growth. The other (Mr. Mulligan) finds that implicit tax increases on work will cost nine million jobs.

While these two effects may overlap, the Build Back Better agenda is a jobs killer. Pushing these programs further into the budget window may change the headline spending number, but it won’t change the economic damage they will do to the nation.

The president’s plan would be the largest tax-and-spend increase—and disincentive to work—since the introduction of the income tax. It would tax those who produce and subsidize those who don’t. It would encourage dependency on government and punish self-sufficiency. Wealth taxes could exceed 70%, and marriage penalties on small-business owners could exceed $130,000. Families could be hard-pressed to keep farms and businesses after the original owner dies. And the real median household income would fall by $12,000. Meanwhile, lower-income households would see their generous government assistance decline rapidly in the event of even a modest increase in earned income.

Increasing the implicit tax on working has the same effect as a statutory tax increase on income, investment and wealth: decreased employment. With inflation-adjusted private investment having declined for the first two quarters of this year, the nation doesn’t need direct—or indirect—tax increases, especially on investment.

Likewise, with a near-record high 10.4 million job openings in August, the same month there were 8.4 million unemployed, the nation doesn’t need additional disincentives to work. The Build Back Better agenda would hamstring a labor market that remains five million nonfarm jobs below its February 2020 levels and potentially reverse the economic recovery.

Nobel laureate James Tobin was a leading Keynesian economist and key adviser to President Kennedy. He described high-implicit-tax situations as causing “needless waste and demoralization. . . . It is almost as if our present programs of public assistance had been consciously contrived to perpetuate the conditions they are supposed to alleviate.”

https://www.texaspolicy.com/build-back-better-would-sink-the-labor-market/