President Biden has proposed a budget for fiscal year 2024 that will increase government spending by 10% while raising $5 trillion in new taxes over the next decade. He says he won’t raise taxes on households with annual incomes below $400,000. This budget could lead to stagflation, worse than the country has ever experienced.
A prudent spending proposal will seek to maintain discretionary spending limits at a time when record government deficits have pushed total public debt above $31.5 trillion. This includes entitlement programs (Social Security, Medicare, etc.) and all expenditures except interest on public debt.
Instead, Biden is proposing to spend more money than the government simply doesn’t have.One alternative is to keep discretionary spending steady at pre-pandemic levels.
according to IRS only 1.8% US households earn more than $400,000 a year. So, according to Biden, these nearly 2.5 million capital-producing households would also make him pay $5 trillion in taxes.
If Biden passes this budget, the economy will experience very slow growth and very high inflation. The reason is really simple.
A large increase in government spending creates more demand in an economy already experiencing inflation, causing overdemand. Biden wants increased demand to be met by increased supply. Then there would be little inflation and big growth. But in reality, the exact opposite happens.
For a business to increase its output (supply), it needs two basic inputs. The first is labor. As the labor force participation rate declines, fewer workers are entering the labor force. It’s already causing a manpower shortage. That means it’s nearly impossible to find a new workforce for future expansion.
In many cases, businesses can replace labor with a second input, capital. This is done through automation, artificial intelligence and robotics. This requires a large amount of new capital.
Part of the new capital will be created from the company’s retained earnings. This is the income earned after paying taxes and paying dividends to shareholders and represents the return on the shareholders’ investment.
Biden wants to raise the corporate tax rate from 21% to 28%, which means a 33% increase in corporate taxes. After paying the required dividends to shareholders, retained earnings will decrease and much less capital will be created.
Most of the new capital comes from households earning over $400,000. If Biden raises $5 trillion in taxes on these households, nearly $5 trillion less capital will be created. This means he has $5 trillion less capital available for businesses and other capital-demanding initiatives.
Without new capital and labor, the business simply cannot expand. That means the economy cannot grow and stagnate.
Businesses cannot produce more, so if demand exceeds current supply, the only way to respond is to raise prices, which leads to further inflation. The result of Biden’s proposed budget is a stagnant economy with more inflation, which is stagflation.
The 2024 government budget comes at a critical time and could set the course for much of the next decade. A responsible government that truly puts the needs of the majority of Americans first will face economic problems wisely. That means holding solutions to real or perceived social injustice and the issue of climate change as his second priority.
Public debt has reached its ceiling. This issue should be addressed immediately. Regardless of everything the Biden administration is putting out, his budget will lead to a deficit of trillions of dollars annually for at least the next decade.
At the same time, eligibility issues need to be addressed before both Social Security and Medicare go bankrupt. There is no good solution to this problem, so the worst solution would be to gradually raise the retirement age to at least 70, maybe 72 for him.
It’s also a good time to get the government to stop giving free money. Decades of data show that these programs have had little to no impact on the quality of life of those targeted.
The 2024 budget should make economic growth a top priority. This simply means that households have the opportunity to earn at least somewhat above inflation and are encouraged to do so because free money is on hold. Businesses need qualified, well-trained, educated and motivated people.
And most importantly, the business needs as much new capital as possible. Biden’s proposed budget will exacerbate our economic problems.
Michael Basler He is a public policy analyst and professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written editorial columns for major newspapers for over 35 years.
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