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How Biden and Trump's tax plans could impact the economy

Yahoo Finance’s Alexis Christoforous and Brian Sozzi compare President Trump and Democratic nominee Joe Biden’s tax plans, and what they could both mean for the economy with Tax Foundation President, Scott Hodge.

Video Transcript

ALEXIS CHRISTOFOROUS: Well, as Trump and Biden get ready to face off tonight in the first presidential debate, we are taking a closer look at their tax plans and what it could mean for the economy. A brand new analysis from the Tax Foundation out just this morning, is casting some doubt over Joe Biden's tax proposals, arguing they would actually shrink GDP.

With us now is Scott Hodge, President of the Tax Foundation. Scott, thanks for being with us. So your analysis says that Biden's plan would reduce GDP by about 1 and 1/2% long term and cost the economy about half a million jobs. There are still others who believe his plan would be good for GDP. So can you explain your analysis for us?

SCOTT HODGE: Well, I'm surprised that others would find that a tax increase would be good for the GDP. When we analyzed his various tax plans, and you have to remember, there are literally dozens of proposals that are scattered throughout his various spending plans, we put that into our macroeconomic tax model and found that number one, the overall cost or increase in taxes from the Biden plan would be about $3 trillion over the next decade, a little over $300 billion a year.

However, when you factor in that slower economic growth that our model finds, the actual revenues would come in at around $2.6 trillion. Now to put this in a little bit of perspective, the deficit this year is well over $3 trillion, so the Biden plan wouldn't be enough to cover even the deficit this year, let alone his spending plans.

BRIAN SOZZI: Well, Scott one of those folks that thinks that higher taxes might be good or at the very least, OK, is former governor Deval Patrick, who just came on and said higher taxes in his view under Biden would lead to low sustained growth. Under your math, what does GDP growth look like under the four years of Joe Biden? Are we talking 1% to 3% type growth?

SCOTT HODGE: Yeah, it's be much slower than what is currently projected. And we have to remember that the official scorekeepers on Capitol Hill, the congressional budget office, have just put out a very, very pessimistic proposal, or projection of economic growth over the next decade. The current economic conditions, as you can imagine, have dramatically lowered the economic performance of the economy.

Obviously, with the extreme number of unemployed and so forth, that's going to cascade or carry into the next couple of years. And so it's hard to imagine that a tax increase would help the economy recover from such a severe downturn. And that's what our results show, is that they would exacerbate the slow economy that's already being projected by the congressional budget office.

ALEXIS CHRISTOFOROUS: Scott, I'd like to get your take on this "New York Times" investigation that President Trump paid just $750 in federal income taxes in 2016 and 2017. I know you can't comment on the president's taxes, but.

SCOTT HODGE: Yeah, haven't seen 'em.

ALEXIS CHRISTOFOROUS: He certainly wouldn't be the first wealthy person to reportedly use some big deductions to avoid paying. What does that report show you that our tax system is severely flawed with some major loopholes, perhaps?

SCOTT HODGE: Well, I guess my perception is, that he's kind of an outlier in all of this. When I look at IRS data, I find that the wealthy tend to pay a much, much higher percent of their income than any other income group. In fact, the recent data out of the IRS shows that the top 1% or 0.1% of taxpayers, it's a small sliver, pay about 27% effective tax rate. And the top 1% of taxpayers, about 1.3 million people, pay more than a third of all the income taxes collected by the federal government.

And by contrast, the bottom 90% of taxpayers pay a much lower share than the top one. So we have a very, very progressive system, and certainly there are some taxpayers, even people at low income levels like us, that take advantage of every loophole in the tax code to lower their tax burden. I haven't seen the Trump tax returns, so I can't comment on them. But they do seem quite like the outlier rather than the typical wealthy individual or business leader.

BRIAN SOZZI: Scott, based on what you're seeing in terms of deficits and where this country is in terms of economic growth, if President Trump were to win four more years, would he have to roll back a good portion of his signature corporate tax cuts to help address the deficits?

SCOTT HODGE: Well, I think it's an interesting question for both candidates. Where we've seen now, $3 trillion in deficit this year. Next year, similar deficits are being projected because of the slump in the economy. And obviously, the government's efforts to prop up the economy during the COVID crisis. Let's look back, for instance, when Bill Clinton came to office. He had a lot of initiatives that he wanted to launch in terms of spending programs and so forth. But his treasury secretary, Robert Rubin, said no, you've got to deal with these high deficits first.

And so what he did is, he cut a deal with Congress that would both cut federal spending and raise taxes in order to reduce the deficit. It'll be interesting to see if both candidates face the same circumstances when they come into office next year. And so I suspect that this is going to be a big debate next year. And there's already talk among some here in Washington of introducing new types of taxes, such as a European-style value added tax, or perhaps even a carbon tax, which some would view as being both good for federal revenues, but also good for the environment by reducing carbon emissions.

ALEXIS CHRISTOFOROUS: All right, we're going to leave it there. Scott Hodge, president of the Tax Foundation, thanks for joining us this morning.

SCOTT HODGE: Thank you both.