The Build Back Better program of President Joe Biden is wish list for many of us. It is built on taxing the wealthy and using the budget to finance better health care, education, and welfare.
The program will be financed by repealing the tax cuts for the wealthy which President Trump introduced. Studies showed that the Trump tax reforms resulted to a big bonanza for big corporations with many of them paying very little taxes. Tax reliefs to corporations were not passed on to consumers. Instead, they were used to provide corporate officers with hefty salaries and perks. Corporations used their tax savings to buy back shares of stocks to enable them to gain greater corporate control. The Biden formula increases the corporate tax rate from 21% to 26% (before Trump, the rate was 35%). The estate tax will be restored and capital gains will be raised from 20 % to 25%.
The expenditures that will be financed are mouth-watering:
- Universal pre-school education for children aged 3 to 4
- Free community college
- Expansion of Medicare services to cover vision, hearing and dental health needs,
- Lower prescription drug costs by providing government with the power to negotiate the cost of prescription drugs with pharmaceutical companies
- 3 months of paid family leave that will give workers the time off to care for newborn children or deal with a medical emergency.
- Production and retrofitting of more than a million rental housing units and 500,000 homes for low- and middle-income homebuyers
- Increase in the child tax credit from $2,000 to $3,000 for children ages six and older and for children below the age of six, $3,600.
Before the TRAIN law was passed, government provided tax reliefs for children. Taxpayers were able to deduct an additional P5, 000 for every child. But deductions are different from tax credits. A tax credit is deducted from the tax that is owed government. For example, a trader can deduct the VAT paid on inputs from the VAT he has to pay on his sales. A tax credit directly reduces the amount of tax that has to be paid. Under the Build Back Better program, a taxpayer with a child who owes the government less than S3, 000 (e.g. with an income tax of $1,000) will be entitled to a S2, 000 refund. And unlike refunds in our country which take eternity to be given, the $2,000 refund will come in the form of monthly checks.
And there are more. The Biden program has features for everybody in need. In the town hall meeting this week, President Biden informed that the budget will enable government to hire and train more caregivers to assist families with aging parents.
For those of us who believe that government exists to redistribute income, the Biden program is music to our ears. It advocates a minimum tax of at least 15% so that the costs of delivering public goods and services can be shared by everyone. In our system where tax incentives abound, we have numerous free riders---they are part of governance but pay 0 taxes. The result is a heavier tax burden for the wage-earners who are caught in the tax net.
With the advent of a new administration, we should be moving towards a fairer public finance that gives equal, if not affirmative action to the poor. We should rethink the rationale for lowering taxes for the wealthy and move towards the provision of tax credits. Unlike tax deductions which give the wealthy higher tax the benefits, tax credits provide everybody with equal benefits.
The tax system has severe limitations in helping the poor. The most that it can do is to exempt them from paying taxes. Unfortunately, the poor are hit the most by consumption taxes like the VAT and excise taxes on gasoline.
We can think of the potential of flat and broad-based taxes towards a simpler tax system. And then, we should give greater focus on a more efficient targeting of expenditures. We have under-utilized the budget in exacting accountability and as a tool for empowerment and freedom.