WASHINGTON – President Biden’s $ 1.9 trillion Covid-19 aid package was funded entirely by loans. He now proposes to spend another $ 4.5 trillion on infrastructure and social programs – without adding to the red ink.
“We can do this without increasing deficits,” Biden said in a joint address to Congress on Wednesday night, describing a series of tax increases for the rich and corporations to pay for programs ranging from building charging stations for electric cars to subsidies. of child care.
Mr Biden’s ability to achieve this goal depends on a number of political and economic variables, some beyond his control. Among them: whether the moderate Democrats will agree to his proposed tax increases and whether these increases will remain in place long enough to cover all additional costs.
Taken together, the proposals will add approximately $ 1
“I think it’s clear that the framework for these proposals is to spend earlier, create a lot of investment that they think will have a steady return on the economy, and reduce very long-term debt,” said Mark Goldwyn, senior vice president. in the non-partisan CRFB based in Washington.
But Mr Goldwein said relying on revenue more than 10 years in the future was risky. When Democrats passed the Affordable Care Act in 2010, they included revenue collection provisions that were subsequently repealed.
The federal deficit, which was historically high and rising before the pandemic, has risen since March 2020, when Congress passed several measures to fight the virus and soften the U.S. economy from recession and as broad business closures and layoffs outweigh tax revenues.
This led to $ 17.4 trillion in US government debt before the pandemic reached $ 21.6 trillion when Mr. Biden took office, or approximately 100% of economic output – putting the United States in a highly indebted league. countries like Japan. Some economists warn that deficit-driven spending could raise interest rates and raise inflation, although this has not happened in the United States or Japan in decades.
Republicans have cited rising public debt as a reason to cut spending and warned that tax increases could hurt the economy by discouraging private investment. Senator Tim Scott (R., South Korea), who sent a response to Mr Biden’s speech to Congress on Wednesday, called his plans a “liberal wish list for big state waste.”
Some Democrats note that the $ 1.5 trillion tax cuts passed in 2017 – which Republicans said they would pay off by boosting growth – contributed to a larger budget deficit before the pandemic.
In recent years, there has been a shift in consensus among many economists on the dangers of deficits and debt, with some, including Mr. Biden’s own advisers, arguing that in an era where interest rates and inflation are expected to remain very low, US capacity to borrow more than was previously thought reasonable.
Mr Biden accepted those arguments when he called for a $ 1.9 trillion-short Covid-19 aid package, saying it was worth taking out loans to speed up the US recovery and avoid long-term damage to the economy.
The relief package adopted in March, known as the US Rescue Plan, is expected to increase government debt as a share of the economy to 108% for fiscal 2021 from 102% before its adoption, according to the CRFB.
Mr Biden has now proposed two more packages, one focused on infrastructure and the other on families, which he says will boost long-term growth with new costs for roads, bridges, research and development, clean energy, affordable childcare and paid family leave, among other programs.
To pay for these plans, he wants to raise the corporate tax rate to 28% from 21%, increase the highest rate of capital gains to 43.4% from 23.8% and tax gains on assets as if they had been sold. When someone dies, it would generate enough revenue over the next 15 years to offset rising costs and expanding tax credits, the White House said.
Finance Minister Janet Yellen said on Sunday that interest rates were low and likely to remain low, “but we need fiscal space to deal with emergencies like the one we were in in the pandemic.” “
“We don’t want to use all this fiscal space, and in the long run we need to limit deficits to keep our federal finances sustainable,” she told NBC.
In total, the two new packages require about $ 4.5 trillion in new spending and $ 3.2 trillion in revenue over the next 10 years. The revenue gap, about $ 1.3 trillion, will be covered by higher taxes over the next five years, the White House said.
The CRFB estimates that Mr. Biden’s $ 2.3 trillion infrastructure proposal, called the US Job Plan, will increase deficits by about $ 900 billion over 10 years, increasing debt to 116% of gross domestic product by 2031. .
The plan will then begin to reduce deficits and debt will rise to 146% of GDP by 2041, or less than the 149% currently projected by the Congressional Budget Service.
For that to happen, however, Mr Goldwein said policymakers would have to allow temporary spending programs, such as an extended tax credit for children, to expire on schedule and make sure that permanent tax increases remain in place. power – factors that depend on which party controls Congress and the White House.
The CRFB’s assessment is in line with an analysis by Penn Wharton’s budget model, which found that Mr Biden’s infrastructure plan would increase debt for 10 years but reduce it significantly by 2050 compared to current projections for CBO.
While higher taxes are helping the fiscal outlook, Penn Wharton has found that they will ultimately reduce economic growth by discouraging business investment.
Finally, the U.S. Family Plan, which includes universal preschool age, a two-year free community college, and a national paid parental leave program, calls for $ 1.8 trillion in new spending and a $ 1.5 trillion tax increase over the next 10 years.
Mr Biden’s cost proposals and taxes on infrastructure and family packages combined seem to pay off over 15 years, but uncertainty remains, said Donald Schneider, an analyst at Cornerstone Macro Research and a former GOP congressional aide.
For example, the administration estimates that its proposal to increase funding for the Internal Revenue Service by $ 80 billion over the next decade to increase taxation would generate about $ 700 billion in additional net revenue over the period, more than other estimates suggest, he said. he. .
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The question has also been raised as to whether Mr Biden can gain enough support in Congress to carry out all his plans. As Republicans oppose new major spending programs and tax increases, the president will need the support of almost every Democrat.
Some moderate Democrats, including Sen. Joe Manchin of West Virginia, have expressed reservations about raising his taxes. If Democrats do not support all of his tax proposals, Mr Biden could be forced to accept an increase in the deficit or reduce his spending plans, which will provoke objections from the progressives.
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