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Wisconsin Spotlight | Dec. 18, 2020

MADISON — The economic impact of the coming runoff elections for Georgia’s two Senate seats will be felt far beyond the Peach State. If Democrats take control of the Senate, Joe Biden’s economic agenda will become a centerpiece of the new administration’s plans. Increased regulation and executive orders on climate and labor market policy are likely no matter the outcome in January, but the fate of the Biden tax plan depends on Congress.

The plan to increase taxes on high earners and on business would affect the economy nationwide, but especially in high-tax states, including California and New York. Many of these locations were facing strong economic headwinds before the start of 2020, but the Covid-19 pandemic has deepened their problems by shrinking their tax bases through business closures and outmigration. The sharp rise in effective tax rates under a Biden administration would worsen the predicament faced by high-tax locations, adding to the fiscal stress.

The effect of taxes on economic growth has long been studied, and the consensus finds negative impacts. Precise quantification is difficult, but the influence of taxes on where individuals and businesses decide to settle is clearer. High-earning individuals and productive firms, according to many studies, tend to be more mobile, and thus more responsive to incentives such as tax differentials. The literature finds that high-productivity firms, high-income individuals, star scientists, top inventors, and prominent athletes all respond strongly to local tax climates. They would face the largest tax increases under the Biden plan.

The Biden tax plan would raise rates nationwide, heightening the response to tax differentials. A tax differential is a bigger factor when the federal rate is higher (and where limitations exist on deducting state taxes). Tax distortions increase with the tax rate, as individuals and businesses change their behavior by working less, investing less, or moving, as they try to retain a dwindling share of the income they earn. This boosts the costs of squeezing a greater share of income out of the economy in tax revenue.

Georgia is not a high-tax state, but it would feel the impact of the Biden tax hikes. Georgia’s top combined state and federal marginal income tax rate would jump from 45.1 percent to about 58.3 percent (according to the Tax Foundation), and around 170,000 Georgians would see a direct income-tax increase totaling about $6.2 billion (according to the Institute on Taxation and Economic Policy). Moreover, with elevated taxes on corporations and pass-through businesses, many more Georgians would see lower wages and incomes through the indirect effects of these levies. A recent Hoover study estimates that the pass-through impact alone would affect nearly 40 percent of employment in Georgia—more than 1.6 million workers. While the direct impact of the tax increases would be at the upper end of the income distribution, a large share of the state would be affected.

Read more at City Journal, a publication of the Manhattan Institute for Policy Research. 

Noah Williams is the Juli Plant Grainger Professor of Economics and director of the Center for Research on the Wisconsin Economy at the University of Wisconsin–Madison.

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