Biden eyes tax increases to help fund up to $4 trillion in new spending

WASHINGTON (SBG) — The first part of President Joe Biden’s “Build Back Better” agenda made it through Congress in a matter of weeks, but the second—a massive injection of federal funding offset by hefty tax increases on corporations and top earners—is poised to trigger a fierce political fight over spending priorities and tax policy that could drag on for months.

The Washington Post reported Monday that Biden’s team has increased the amount of the new spending they intend to pay for with tax hikes as they look to win support from key Democratic constituencies. Officials familiar with the plan said it could involve up to $4 trillion in federal spending and more than $3 trillion in new tax revenue.

After passing a $1.9 trillion American Rescue Plan that will be mostly deficit-financed, White House economic officials worried another wave of unfunded federal spending could destabilize long-term economic prospects and spark an increase in interest rates. Paying for the new investments could also appeal to moderate lawmakers whose votes Biden needs to advance his legislation.

"The president has a plan to fix our infrastructure and a plan to pay for it," White House press secretary Jen Psaki said Monday.

The White House is still gaming out a legislative strategy, but Biden’s recovery proposal is expected to be broken up into two packages. The first, which Biden plans to detail at an event in Pittsburgh Wednesday, reportedly includes more than $2 trillion in investments in physical infrastructure, domestic manufacturing, clean energy, broadband, and home care for the elderly and disabled.

A second package that will be released in April is expected to focus on progressive domestic policy priorities and the “care economy” infrastructure. Likely components of that proposal are child care and family leave programs, expansions of Affordable Care Act health care coverage, and extending an enhanced child tax credit for several more years.

The infrastructure component is expected to be funded by tax increases on corporations, and the domestic policy package is likely to be paid for with higher taxes on wealthy households and investors. Convincing Congress to impose substantial new taxes while the economy is still recovering from the coronavirus pandemic could pose political challenges, but tacking trillions more onto the nation’s debt would also face resistance.

“Lawmakers would be better to be somewhat more cautious and allow the economy to recover before instituting major tax increases,” said Kyle Pomerleau, a resident fellow at the American Enterprise Institute.

According to The Associated Press, the White House is hoping to see the infrastructure legislation begin making its way through Congress by Memorial Day, with the goal of getting a final bill to Biden’s desk over the summer. Democrats see some chance for bipartisan support for physical infrastructure spending, but Republicans have already signaled stiff opposition to raising taxes to pay for it.

"If they share a goal of building our infrastructure for the future but don't like the way he's going to propose to pay for it, we're happy to look at their proposals,” Psaki said Monday.

With the Senate split 50-50, Democrats might need to rely on reconciliation—a complicated parliamentary procedure that allows budget-related bills to pass with a simple majority—if they cannot secure at least 10 Republican votes. They already used reconciliation once this fiscal year to pass the American Rescue Plan, but Senate Majority Leader Chuck Schumer, D-N.Y., is prepared to seek approval from the parliamentarian to do it again.

The tax increases Biden is considering would roll back many of the benefits for wealthy households and corporations contained in the 2017 Tax Cuts and Jobs Act, and they would cumulatively amount to the largest tax hike in generations. Still, the White House maintains Biden aims to keep his promise that households earning less than $400,000 a year will not face higher taxes.

Transportation Secretary Pete Buttigieg told Sinclair Monday Biden’s plan would not include a mileage tax or an increase in the gasoline tax that would raise costs for lower-wage households. However, he pushed back on Republican criticism that the recovery proposal is too big or too costly.

“Eisenhower had a moment like this in the ’50s when they started the Interstate Highway System,” Buttigieg said. “Lincoln had a moment like this with the Transcontinental Railroad. Every once in a while, every 50 to 100 years, there comes a season that is the time to do big things to make America stronger.”

As a candidate, Biden outlined tax proposals that would increase federal revenues by $3 trillion to $4 trillion over 10 years, depending on the analysis. He also proposed about $5.4 trillion in new federal spending.

Proposed tax increases in the campaign plan included:

• Repealing 2017 tax cuts for taxpayers with annual incomes above $400,000
• Imposing a 12.4% Social Security payroll tax on income above $400,000
• Taxing capital gains and dividends at the same rate as income for those earning $1 million or more per year
• Raising the top corporate tax rate from 21% to 28%
• Doubling the tax on profits of foreign subsidiaries of U.S. companies to 21%
• Creating a 15% minimum tax on book profits of corporations with profits of $100 million or more

The Tax Foundation projected Biden’s tax plan would reduce gross domestic product (GDP) by 1.6% over 10 years and result in an average 1.9% decline in after-tax income for all taxpayers. The analysis also estimated it could cost the economy about 542,000 jobs.

Although Biden did not propose any tax increases for households with income below $400,000, a Tax Policy Center analysis estimated the indirect effects of raising corporate taxes and a projected reduction in wages and investment would result in a drop in after-tax income of 0.5% or less for the bottom 80% of taxpayers. The top 20% would see a 4.7% decline in after-tax income over 10 years.

“Raising taxes on high-income families and corporations would provide needed revenue for administration priorities such as infrastructure and addressing income inequality,” said Gordon Mermin, a principal research associate at the Tax Policy Center. “Still, doing so would reduce incentives for work, saving, and investment, which could reduce economic growth.”

How much of Biden’s campaign proposal will make it into his announcement Wednesday is not yet clear, and competing political considerations could trim his plan back as it proceeds through Congress. Sen. Joe Manchin, D-W.V., whose vote will be essential to passing anything, has indicated he would support a corporate tax rate of 25%, for example.

Other moderate Democrats have voiced concern about instituting steep tax hikes in the wake of an economic crisis. Some have also pressed for lifting the 2017 tax law’s limit on state and local tax deductions, a move that would primarily benefit wealthier taxpayers in high-tax states like New York and New Jersey.

Axios reported Tuesday that Biden’s top priorities are increasing the corporate tax rate, raising taxes on the top income bracket, the capital gains tax reform, and the higher minimum tax on foreign profits. Those provisions could bring in $1.8 trillion in new revenue over 10 years.

“I want to change the paradigm,” Biden said at a news conference last week. “We start to reward work, not just wealth.”

With federal debt held by the public on track to exceed 107% of GDP by 2031 and the Congressional Budget Office warning it could top 200% of GDP by 2050, some experts say any new spending must be offset. Congress has already piled on more than $5 trillion in new debt since the pandemic began.

“We are becoming dangerously numb to borrowing massive amounts of money,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. “Strong nations borrow when necessary, not when it is politically convenient. It is important for the future health of the economy that we are willing to pay for our priorities.”

However, even some economists who have reservations about Biden’s plans say the concern about adding to the debt at this point might be overstated. The cost of borrowing is currently extremely low, and inflation and other negative consequences that had been expected from skyrocketing deficits in the past have so far not materialized.

“The economic downside of deficit financing has not been felt in recent decades, as interest rates have remained at historic lows despite record deficits, partly because of high demand for U.S. treasuries around the globe,” said William McBride, vice president of federal tax and economic policy at the Tax Foundation.

According to Pomerleau, the imperative to pay for new investments appears to be more political than fiscal. The debt poses a long-term challenge that eventually needs to be addressed, but the federal government could likely borrow more without creating major economic issues.

“There are some moderate Democrats that are uncomfortable with borrowing an additional $3 trillion to $4 trillion,” he said.

Republicans and conservative advocacy groups are already lining up to battle any potential tax increases, even as some GOP lawmakers agree on a need to invest in infrastructure. According to Axios, a new group called the Coalition to Protect American Workers intends to spend at least $25 million on ads urging moderate Democrats and Republicans to oppose the bill, but progressive groups are planning similar ad blitzes in support of new taxes.

Proponents of a massive federal expenditure on infrastructure argue the economic growth and job gains it would produce far outweigh the risks of raising taxes. House Democrats project every dollar of infrastructure spending can increase near-term economic output by $1.50 and can enhance the productive capacity of the economy.

Others say the repercussions of such investments depend greatly on how the money is spent and how it is offset. Even in a best-case scenario, some analysts estimate the economic benefits would be more marginal.

“We estimate it would be a net negative for the economy if the additional infrastructure spending were financed by higher taxes on corporate and individual income,” McBride said. “If instead the spending were financed by user fees, such as a gas tax or vehicle miles driven tax, the net effect would be a small but positive effect on GDP.”

A 2016 Congressional Budget Office analysis projected the impact of $500 billion in federal investment in the economy both if it was paid for and if it was debt-financed. The report concluded if the spending was fully offset, it would result in a slight increase in the size of the economy, but an investment that was not paid for could decrease the size of GDP by 0.03% over 10 years.

“Investing in reliable and resilient infrastructure can help the economy, but the research is clear that the return is fairly modest,” MacGuineas said.

Experts expect Democrats will attempt to tailor their tax increases to adhere to Biden’s pledge to avoid direct impact on those earning less than $400,000 a year, but some advised against engineering tax policy to shield certain income groups. That approach takes some fiscally responsible options off the table.

“It really constrains what Biden and lawmakers can do for raising revenue,” Pomerleau said.

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The tax hikes on corporations and the wealthy expected to account for most of the offsets would inevitably have some negative effects on the finances of others in the economy, as well. McBride predicted top earners would have less incentive to work, invest, and spend money under Biden’s proposals, and that would impact the workers who provide goods and services to them.

“It is not economically possible to isolate the effects of a $3 trillion tax increase so that it affects only those earning more than $400,000,” he said.