Analysis of Sen. Kamala Harris’s Subsidy Proposals: Economic Impact and Potential Risks
Sen. Kamala Harris has proposed several subsidy ideas, including small business tax deductions, taxes on unrealized gains, and downpayment assistance. According to critics and experts, these proposals may not align with sound economic principles. Let's delve into each of these measures and their potential impacts.
Small Business Tax Deduction
Sen. Kamala Harris has proposed a small business tax deduction of $50,000, which, if the taxpayer does not itemize, would be available. Analysts and economists have analyzed the potential economic implications of this proposal. Harris does not offer tax decreases but rather a deduction of $50,000 that can be rolled over into the personal tax calculation for the owner.
According to the analysis, small businesses in the U.S. with a single owner/employee, the majority of which are based out of the home, make an average of $44,000 per year, with almost two-thirds bringing in under $25,000 annually. Small business owners average an income of $60,000 per year, and the average small business has $40,000 in business expenses per year.
Therefore, Harris' proposal would allow an additional $10,000 deduction, which would roll over into the personal tax calculation for the owner. If a single small business owner is married with no children and no other income, their personal deduction is $27,000. Thus, after their deduction, their taxable income would be $33,000.
With Harris' proposal, their taxable income would be reduced to $23,000, leading to a federal, state, FICA, and income tax savings of $1,708 per year or $34.48 per week. This is equivalent to an annual salary increase of just under $86, based on a 40-hour work week.
However, it is crucial to note that claiming losses year after year can raise suspicion and warrant an IRS audit, which can go back six years. The IRS allows small business owners to claim business losses for three out of five tax years. Afterward, it may classify their business as a hobby, making it ineligible for tax deductions and causing them to have to pay back taxes, penalties, and interest for all the years the IRS claims their business was a hobby.
While Harris' proposal may make tax filing for small businesses a little easier, it is not without real financial risks. Many small business owners are not adept enough at understanding taxes to avoid trouble.
Tax on Unrealized Capital Gains
Another proposal by Sen. Kamala Harris is a tax on unrealized capital gains, which would have profound negative effects on the US economy. This tax would dramatically impact investment in new product development, innovation, design, and research. It would also severely affect the venture capital markets, substantially reducing the value of investment funds like Vanguard, Blackrock, and Fidelity, among others.
Furthermore, it would cause multinational corporations to relocate their headquarters outside the US, thereby destroying investment in factories, facilities, and large business centers. In short, this single tax could deindustrialize the US, reduce our standard of living, and create an economic environment from which there could be no recovery.
Downpayment Assistance
Sen. Kamala Harris's proposal for downpayment assistance of $25,000 would also have significant deleterious effects on the US economy. According to analysis, this government assistance could raise the price of starter homes by around $40,000 and potentially add 3.5 to 4.5 percentage points to the inflation rate.
The price increase in homes would be reflected throughout the housing market. When "move up" houses are valued at about three times the price of starter homes, the inflation impact would be more pronounced. For instance, a $260,000 starter home could become a $300,000 starter home, while the value of a $900,000 "move up" home remains relatively unchanged.
The current core inflation rate is 3.4%. If a borrower takes out a loan for a $275,000 starter home, which would cost around $300,000, with a $25,000 down payment and a 2.5% interest rate over the inflation rate, the annual interest would be 8.4%, resulting in a monthly payment of $1,714, plus taxes and impounds.
On the other hand, buying the same house with only a 10% down payment and no downpayment assistance would cost $260,000. At today's Freddymac published rate of 6.08%, the total interest rate would be 5.9%, resulting in a monthly payment of $1,483, plus taxes and insurance. At a 25% ratio, a borrower would need to earn $924 more each month to qualify for the loan with the downpayment assistance.
In summary, all three of these ideas are very bad and could have significant, negative consequences for the US economy. They should be carefully reconsidered before implementation.