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BFI Perspectives 

Leftist Tax Policies Will Destroy U.S. Competitiveness

Leftist policies have destroyed the vibrant economies of several U.S. states. Their effects have been most prominent in California, Illinois, and New York, where they inflicted severe damage and continue to do so. Now, under the Biden Administration, the federal forces are also following this destructive pattern, promising that higher taxes will bring about greater equality and “prosperity for all”.


President Biden’s pre-election rhetoric largely revolved around “fairness” and “equality”. We recently got to see what these promises look like in practice, with the ambitious corporate tax increases that were attached to his administration’s “infrastructure” bill. These hikes are set to bring the US corporate tax rate to 28%, among the highest in the developed world. While this might seem like a moderate increase compared to the 2016 rate of 35%, it really isn’t. Both the base broadeners and revenues are set to see an enhancement, and tax rates are skyrocketing.


What is Behind the Leftist Tax Policies?


The Modern Monetary Theorists that are abundant in the Democratic Party have made one thing clear in recent times: They do not think debt matters, since the government and the Federal Reserve can simply “print” and borrow money at will. Even moderate Democrats agree that “with the low interest rates we currently enjoy”, debt and deficits are not a concern for the US.

So, what is behind the hefty tax increases? The mislabeled “infrastructure” bill by President Biden includes spending hundreds of billions on selective green technologies and clean energy innovation. This includes “perceived” and “favored” green technologies such as wind farms and electric vehicles, which can, of course, see greater corporate involvement and investment compared to behavioral adjustments, zoning reforms, and nuclear power. Subsidizing “pet” green projects would work both ways – greater taxes to develop fields for “green” investments and greater corporate investments to tax.

Although the big word on the left is ‘compassion’, the big agenda on the left is dependency. The more people who are dependent on the government handouts, the more votes the left can depend on for an ever-expanding welfare state. ~ Thomas Sowell

Where Does It All Trickle Down To?


The old and overused argument about making big corporate players “pay their fair share” has long been debunked. Tax hikes like these actually only lead to higher prices, lower wages, and lower returns on capital. Simply raising taxes is a naïve and poorly thought-out solution to the multi-faceted problems the US is facing.


States like New York, Illinois, and California, which are counted among the most “progressive” in the nation, have had to face the dual challenge of the strictest pandemic restrictions and the burden of leftist policies. The terrible mix of increasingly tight regulations, rampant spending and debt, and cumbersome taxation has led to an exodus of capital, talent, and life itself from the states.


Chart: Goodbye New York! States with Highest Negative Domestic Net Migration between April 1, 2010 and July 1, 2019

Source: Statista, U.S. Census Bureau


The list of those leaving California now includes names such as Elon Musk, Ben Shapiro, and even Joe Rogan, a self-declared Democrat. Numerous small- and medium-sized business owners, who are struggling to keep up with the crippling tax policies, are also leaving the state. Most are fleeing to conservative states like Texas or Florida, that not only offer lower taxes, but have also opted for a more relaxed approach towards lockdowns, mask mandates, freedom of movement, and business shutdowns. Rural areas have also been more attractive compared to left-leaning populous metropolitan hubs which embraced more aggressive strategies during the pandemic.


This mass exodus was certainly accelerated by the pandemic and all the suffocating restrictions in most left-leaning states and cities, but it was already underway for years. According to statistics shared by the US Census Bureau, the five states that lost the most residents between 2010 and 2019 – New York, California, Illinois, New Jersey, and Michigan - were all Democrat strongholds, known for their excessive interference and aggressively redistributive tax policies. They lost 4 million people collectively.


What Makes for a Competitive Economy?


The World Economic Forum has been measuring competitiveness of countries since 1979. It defines competitiveness as “the set of institutions, policies, and factors that determine the level of productivity of a country.” Another way to look at it would be to gauge the promotion of well-being; productive economies lead to growth, growth leads to higher income levels, and fundamentally speaking, higher income levels do contribute towards improved well-being.


One of the main pillars of competitiveness is business innovation and sophistication. This essentially means that an economy should be able to attract world-class businesses and research establishments through supportive policies by a supportive government. These businesses can spearhead not just technological readiness and productivity, but also improve the well-being of the weakest sections of society through employment, higher wages, improved accessibility, and better life solutions.


Taking a look at states like New York and California, it is plain to see that the crushing majority of those who are leaving are highly educated, high-earning, and highly-skilled individuals. These are business owners, top executives, and entrepreneurs we are talking about, who are leaving not just cities and states, but often even the country in search of greener pastures – less regulated, tax-friendly jurisdictions.


What are the Implications?


As more and more business owners and entrepreneurs leave the country and settle abroad, the United States will lose an invaluable pool of business innovators and, as a result, its standing in terms of global competitiveness. The exodus of top business owners would impact the labour market and wealth on one hand, and entrepreneurial innovation on the other. This could single-handedly bring down the technological prowess, prosperity, and productivity of the country, and hence the well-being of its citizens.


Then there is the impact of domestic migration away from states like New York, Illinois, and California. There is a lot of anxiety in the air about the effect such an exodus will have on the politics and the culture of the states that the new arrivals are flocking to. The fear is that they could bring their “progressive” politics with them and that this could pave the way for an intrusive government sooner or later in these states as well. This “great migration” can reshape the electoral map, for it is the ideas, choices, and votes of these newcomers that, in one way or another, rendered their home states uninhabitable.

Migration from California to US States

Source: US Census Bureau ACS


There is also a more optimistic counterargument though. Considering that those who left these states had both the means and the will to do so, those that are left behind are either truly Leftist or not wealthy enough to relocate. This implies a possibility of a historic redistribution of wealth from these “highly progressive” urban centres to other areas in the nation. New hubs of wealth and prosperity, innovation, and employability could emerge in these new states sometime in the future.


What Next?


With Democrats at the helm of the country now, more bureaucracy and higher taxation are back in favor. Investors cannot afford to ignore the impact this will have on the nation’s global competitiveness. The US is in stiff global competition, with China as its biggest rival. With the Chinese doing everything they can to build a competitive economy, the country is becoming a hub for some of the most successful companies on their way to beat international, established adversaries. On the other hand, Biden and his “progressive” friends are more interested in looking and sounding good, while damaging the very foundations the US economy was built on.


Higher taxes do not lead automatically to full state coffers. This is the naïve, if not ignorant, belief of most leftists today. Full coffers come from a vibrant, competitive economy, which comes from a lean and unintrusive government that supports private business initiatives and fosters innovation. Unfortunately, the Biden administration has taken a very different path.


Unless this government stops punishing hard work, entrepreneurship, competitiveness, prudence, and excellence with higher and higher taxes, it will keep depriving the poor, disadvantaged, and weaker sections of the society.

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