Congress continues to debate the merits of President Biden’s “Build Back Better” plan. The progressive wing of the Democratic party wants to pass a $3.5 trillion reconciliation bill full of new and bigger government programs, while moderates want to slow down to consider more targeted programs. A recent poll reveals that Americans are more aligned with the moderates than the progressives.
Poll results released by Gallup late last week show that 52% of Americans think government is trying to do too many things, up from 41% since last year. In fact, except in rare circumstances, Americans typically think government is doing too much. According to this poll, only two times in the last 29 years have a majority of Americans endorsed a more active role for government—post 9/11 and at the beginning of the Covid-19 pandemic.
This is not the only question that reflects Americans’ general preference for a smaller government. People often point to polling that shows Americans prefer this or that government program, but those questions are typically asked without mentioning the higher taxes required to pay for new or expanded programs. In the Gallup poll, Americans are asked to consider both more government services and the taxes needed to pay for them. Half of Americans say they prefer fewer services and lower taxes, while only 19% want more services and more taxes. As shown below, this distribution of responses has been fairly stable for the last 29 years.
People are right to be skeptical of higher taxes to pay for new programs, and the current reconciliation proposals are full of higher taxes—over $2 trillion worth.
In addition to the direct effect of less money in our pockets, there is robust evidence that higher taxes impede innovation. Higher income taxes reduce the incentive to create new products and services. As a result, the quality and quantity of innovation as measured by patents declines. Higher state and federal taxes also encourage inventors and entrepreneurs to migrate to lower tax jurisdictions, which means fewer new businesses in America.
Too often politicians fail to account for how taxes reduce innovation and economic growth. This makes new government programs appear to be a better deal than they really are.
A more nuanced tax change being discussed that would affect innovation is the taxing of carried interest. Carried interest is a share of a venture capital (VC) fund’s profits and is the primary source of income for a fund’s general partners. Currently it is considered a return on investment and is taxed at capital gains rates rather than the higher ordinary income tax rates. Some politicians want to change this by taxing carried interest as income.
VC is an important source of funding for new innovations (read how VC supported Moderna) and a new study suggests that changing how carried interested is taxed would reduce innovation by diminishing the appeal of starting a new VC fund, especially in states outside the big three of California, Massachusetts, and New York. VC funds outside the big three states tend to be smaller and less lucrative, so taxing them at a higher rate makes it more likely that general partners will remain employed somewhere else instead of starting a new fund.
Smaller first-time VC funds located outside the big three states help spread the benefits of innovation around the country, so it would be especially harmful for states like Ohio, Georgia, or Colorado if the formation of new funds were curtailed by tax changes. The study also notes that the partners of smaller first-time funds are often women and members of minority groups, which helps increase diversity in the investor community.
In addition to spending a lot of money, President Biden’s plan will also impose a lot of new regulations. Economist John Cochrane recently wrote about just one piece of Biden’s agenda, the childcare tax credit. The proposed language contains rules for measuring the quality of childcare providers, licensing standards for childcare providers, and complex formulas for calculating the tax credit each family would receive.
As Cochrane writes, “So what will all this do? I’ll hazard a forecast. This will create a big state bureaucracy. The majority of child-care operators, especially those who work for actual poor and disadvantaged people, in poor and disadvantaged areas, will look at this mess and say no thanks, we don’t take federal money… The [U.S.] creates one more of thousands of programs with take-up rates in the low single digits. Politicians get to feel good about offering childcare, without actually doing it. Costs of the official programs balloon.”
More regulation is also not popular according to Gallup’s poll. Forty three percent of Americans, including a plurality of independents, think there is too much government regulation of business and industry. As shown below, at least a plurality of Americans regularly think regulation is too pervasive, regardless of who is president.
While President Biden’s agenda is being debated in Congress, moderates on both sides of the aisle should take comfort in the fact that many Americans also think government is too big and invasive. Some government programs are helpful, but with inflation still high and federal debt rising rapidly, now is not the time to add a bunch of new taxes and regulations.