Garrett Watson, The Tax Foundation Senior Policy Analyst, joins The First Trade with Alexis Christoforous and Brian Sozzi to discuss how presidential candidate Joe Biden's tax plans could impact the markets and much more.

Video Transcript

BRIAN SOZZI: There are some policy choices that can impact all of us. So today, we're taking a closer look at Joe Biden's tax plans. Garrett Watson, senior policy analyst at The Tax Foundation, has dug into the plan and joins us now. Garrett, good to speak with you today. You know, one of the themes coming off the start of the convention yesterday, Joe Biden may push off tax increases and perhaps he's a more moderate-- would be a more moderate president. But you have crunched the numbers. And what your numbers suggest, he would be negative for GDP growth. Walk us through this.

GARRETT WATSON: That's right. Joe Biden's tax plan primarily aims at raising taxes on high earners, raising taxes on corporations, and raising taxes on business and investment income for those higher earners. Overall, it'd raise about $3.5 trillion over 10 years, but we find that it does have an impact on economic growth. It would reduce growth by about 1.5% over the course of the long run and would reduce jobs by about 800,000 overall. And so there really is a trade-off when it comes to these tax hikes in the form of reduced growth. And that's especially important right now, as we're trying to rebuild the economy and get out of this economic crisis.

ALEXIS CHRISTOFOROUS: You know, if we don't raise taxes, I mean, aren't we heading for a cliff once the stimulus bills all start to come due and the fact that we're, you know, printing money and our deficit continues to balloon?

GARRETT WATSON: That's right. Debts and deficits are going to be increasingly important to tackle coming out of this crisis. It's really important right now to be prioritizing targeted relief to the most vulnerable, given how high the unemployment rate is right now and the public health crisis that we're facing. But as that crisis recedes and growth resumes, we will need to tackle these rising debts and deficits. That will require tough decisions on the spending side of things but will also-- probably will require a conversation about revenue. And we need to find ways to raise revenue through the tax system that also minimizes the economic harms, and that's going to be the tough trade-off that any next administration and next term will have to deal with, both to balance long-run growth while also raising the revenue we need to reduce these debts and deficits.

BRIAN SOZZI: Garrett, what did you find in Kamala Harris's tax plan?

GARRETT WATSON: Harris's tax plan shares a lot of similarities with Joe Biden's, in that it really does target repealing elements of the Tax Cuts and Jobs Act, the tax reform a few years ago, and does try to raise revenue from higher earners, though she is more aggressive in doing so by pushing for higher tax rates and would raise a bit more revenue. The other thing is she's developed a very fleshed-out plan for tax credits and providing relief for lower earners, and that's something we haven't seen as much from Biden yet. So looking forward to seeing how the campaign decides to take that plan and whether or not that becomes a centerpiece of his tax plan moving forward.

ALEXIS CHRISTOFOROUS: You know, for all his promises, Trump says, you know, he's not going to raise taxes. Will he have no choice but to do that if he's elected again, during his next four-year term, simply because the numbers aren't going to match up and cities and states are going to need-- and the federal government is going to need revenue source?

GARRETT WATSON: We are going to have to have a discussion about what those forms of revenue need to come in to close debts and deficits and to rectify our budget situation, and that requires prioritizing places that are-- that we can raise taxes that minimize the effects on growth. Places like tax expenditures, broadening the tax base, looking at items like the state and local tax deduction or even the home mortgage interest deduction are probably the first places to look at. Those are expenditures that typically benefit the well-off and would make the code simpler and more neutral if we were to reform them and minimize them.

And of course, we also have to prioritize pro-growth elements, which also will help on the budget side of things. A big one, of course, is allowing businesses to fully deduct the cost of their investments when they make them, something that the Tax Cuts and Jobs Act made progress on, but something that we're optimistic that we can get bipartisan support on in combination with other tax reforms that will help with the budget situation.

RICK NEWMAN: Hey Garrett, Rick Newman here. Biden also wants to essentially raise the capital gains tax, make it equal to the highest tax on income for I think it's people earning over $400,000. Would that affect stock values, do you think?

GARRETT WATSON: We do think that it would have an effect on the economy, on the financial markets potentially, and on economic growth overall, though it's worth not overstating those effects. Generally, the economy being more international than it has been over the last few decades, savings overall is not a problem for additional investment and to generate profits in the United States. And so while there is a growth effect from changing the rates overall, either higher or lower-- the president, for example, would like to see them cut to 15%-- the priority really should be on areas where there is going to be the greatest damage to the economy. And typically, we see that through direct taxes on firms and businesses and through cost recovery items, like being able to deduct the full cost of your investments in the tax code. And so while capital gains is important and something we need to talk about and the tax treatment of savings overall can really be improved in this country, that's not a place where we think is going to be a particular harm or benefit moving forward, given the evidence that we have.

RICK NEWMAN: Biden also, he now favors that alternative corporate tax that Elizabeth Warren rolled out when she was running in the primaries. So the idea there is for companies that don't pay a lot of tax because they use different write-offs but they do have a lot of income they report to shareholders, to make them pay some minimum tax. But those write-offs are part of the legal tax code, and they're there as incentives to invest and do other things. Does that make any sense, that corporate alternative-- that alternative corporate tax? And if you tried to enact that through legislation, would you then have to change the incentives that it's actually trying to counteract?

GARRETT WATSON: You're right. The minimum tax proposal is meant to try to go after corporations that they post book income but don't have taxable profits. And one of the biggest differences between those two types of income is write-offs for new investments, which is something that we want to be incentivizing right now, not penalizing.

Overall, minimum taxes are a very blunt instrument for raising revenue and reforming the corporate code. It would make things much more complicated and, to some extent, would actually put some of some of these tax decisions in the laps of accountants and the financial community, something that's also concerning. So overall, it would be better for policy makers to think about ways to tweak the tax code directly, in terms of taxing corporations, rather than going the route of minimum taxes, which is going to increase complexity and disincentivize the very kind of investment we need right now that's going to get us out of this economic crisis in the years ahead.