Like Christmas In August: Tax Hikes For All

Save America. Kill the bill. The bill of course, is the Schumer-Manchin reconciliation bill. Killing it will not be easy, but we will continue to put our best foot forward on policy grounds.

The more we learn about this bill, the less everybody seems to like it. The “Inflation Reduction Act” doesn't seem to have much inflation reduction in it, according to the Penn-Wharton budget model. It’s not a supply-side model, but its results suggest that the impact on inflation is statistically indistinguishable from zero. Let me just say, there’s never any automatic link between budget deficits and inflation anyway. So I never bought that argument to begin with.

The principal cause of inflation is overly easy money, and in this current cycle overly excessive federal spending contributed as well. One of the economy killers beside skyrocketing inflation is President Biden’s woke regulatory strangling of the economy — starting with fossil fuels, but continuing through virtually all business and industry.

Mr. Biden slapped on $200 billion worth of regulatory costs in his first year alone. That’s more important than a bunch of phony accounting gimmicks designed to bring down the budget deficit for a couple of years.

If you take a look at reconciliation, there’s a $739 billion tax hike and $433 billion in spending, but the Obamacare spending is only scored for three years. Over 10 years it will be more than $200 billion. So that wipes out about $150 billion in so-called deficit reduction. And the idea that we're going to give the IRS another $80 billion that will generate another $124 billion in tax revenues — that game is tried again and again and it fails again and again, and it’s just more phony baloney.

Also, energy loans and loan guarantees are scored as interest-yielding assets generating a lot of money. Good luck with that. Remember Solyndra? Or how those student loans worked out?

The biggest whopper is that the deficit-reduction crowd kind of forgot to add in the $280 billion CHIPS+ bill that had no pay-fors. I’m sure it’s just an oversight. Suddenly, when you tally last week’s congressional actions, there’s almost $900 billion in spending against $740 billion in revenues, which sounds like a deficit to me. Please feel free to check my math.

More important is this whole idea that 100 percent expensing of business investment is a tax loophole. It’s not. The reason taxable income is lower than book income for corporations is you get to deduct by law, by intention, in the 2017 Trump tax cuts to permit immediate bonus deductions for new plants, equipment, technology, etc.

This was done to make America more competitive, to increase productivity and real wages and typical family incomes on purpose — along with the tax rate reduction to 21 percent from 35 percent.

Those were the twin pillars of the supply-side business tax cut. And it worked. Median income soared. Unemployment crashed. Poverty fell. Inequality fell. There was no inflation, and abstracting from the pandemic shutdown, it paid for itself as the Laffer curve kicked in. The Schumer reconciliation bill would stop the surge of business investment. Big mistake.

Because 70 percent of the corporate tax burden is borne by blue-collar working people, putting in a 15 percent alternative minimum tax on book income is going to lead to across-the-board tax increases. According to the Joint Committee on Taxation, which is no friend of supply-siders, 50 percent of the burden of the minimum tax would hit manufacturers.

By the way, today’s ISM report for manufacturing fell to its lowest level since June 2020. But then, to varying degrees, every other industry will shoulder tax hikes, including a 7.2 percent tax hike on coal, and a $25 billion tax hike on oil — and for that matter fossil fuels in general. And, get this, there's a carveout for Green New Deal tax credits. There’s a shocker.

There’s also a carveout for a refundable tax credit on semiconductors, though the chip industry will be hit hard by the 15 percent minimum corporate tax. What the one hand giveth, the other hand taketh away.

Some other tidbits, again from the Joint Committee on Taxation: People earning less than $10,000 a year will be hit the hardest, with a 3.1 percent tax hike; those between $20,000 and $30,000 will have a 1.1 percent tax hike; people under $100,000 will get a $6 billion tax hike; people making less than $200,000 a year will have a $17 billion tax hike.

So, pretty much everybody gets a tax hike. What a joy: Just like Christmas in August. Terrific stuff.

Here’s a multiple-choice question: Will this tax hike make the economy A) growthier or B) more recessionary? If you answered B, you win the lottery.

Next question: Will roughly $900 billion in additional spending generate A) higher inflation or B) lower inflation? If you answered B, you also win the lottery.

On an after-tax, after-inflation basis, though, lotteries are not worth what they used to be. For heaven’s sake: Save America. Kill the bill.

Larry Kudlow was the Director of the National Economic Council under President Trump 2018-2021. His Fox Business show "Kudlow" airs at 4 p.m &. radio show airs on 770 ABC from 10:00 a.m. to 1:00 p.m.