Is Biden a Deficit Hawk or a Deficit Cicada?
Just like the Brood X cicadas getting their wings after 17 years underground, President Biden again found his deficit hawk wings. When asked if he’d compromise in raising the corporate tax rate to 25 percent instead of 28 percent, Biden this week said, “I’m willing to compromise but I’m not willing to not pay for what we’re talking about. I’m not willing to deficit spend. They already have us $2 trillion in the whole.” The $2 trillion Biden was referring to was the deficit from the Tax Cuts and Jobs Act (TCJA) Republicans passed in 2017. Biden yesterday then said the corporate tax rate should land somewhere between 25 and 28 percent.
Is this a reemergence of Democratic deficit hawks, and if so, what does that mean for the American Jobs Plan (AJP) and American Families Plan (AFP)? Biden’s MO throughout his career in the Senate and as vice president was to hew towards the Democratic establishment thinking of deficits. That thinking was largely to take deficits and the specter of what deficits can bring rather serious.
However, Biden’s comments should be taken with a grain of salt. First off, the AJP and AFP proposals Biden put forth are already partially deficit financed. The AJP and AFP combined have about $4.5 trillion in new spending and tax credits that’s offset by $3.3 trillion in new taxes over the next decade. However, at least for the AJP, the White House extended the budget window for the taxes to 15 years while keeping spending to 8–10 years. The Congressional Budget Office (CBO) estimates increasing the corporate tax rate by one point would raise about $100 billion over a decade. Increasing it from 21 percent to 28 percent over 15 years would raise about $1.05 trillion. That same revenue could be raised by increasing the corporate rate to 25 percent over 26 years. Republicans during the TCJA process debated extending the budget window for a reconciliation bill beyond the traditional 10 years to 20 or even 30 years in order to extend the length of tax cuts. Internal opposition and a desire to make the corporate cuts permanent kept them at 10 years. Biden already proposed a 15 year horizon for some of the proposed tax increases. When he has called the AJP and AFP “once-in-a-generation” investments, Democrats may be open to making the budget window the length of a generation.
Biden’s comments should also be viewed as a negotiating tactic with Republicans. He’s putting the onus on the GOP to come up with some pay-fors. When he says he’s willing to compromise on the corporate rate to somewhere between 25 and 28 percent, that’s not compromising with Republicans but rather with Democrats. Republicans are insistent on not increasing the corporate rate. Biden is insistent on not increasing user fees like the gas tax, leaving the pay-for debate at a seeming impasse. This may all be laying the groundwork for the inevitable move away from bipartisanship.
Biden will be meeting with Senate Republicans next week on infrastructure as well as with congressional leadership. When asked about internal party dynamics and the looming ouster of Rep. Liz Cheney (R-WY) from her leadership position, Senate Minority Leader Mitch McConnell (R-KY) pivoted to focusing on opposing Democrats. “One-hundred percent of my focus is on standing up to this administration,” McConnell said. “What we have in the United States Senate is total unity from Susan Collins to Ted Cruz in opposition to what the new Biden administration is trying to do to this country.” His comments harkened back to when he said before the 2010 midterms that “The single most important thing we want to achieve is for President Obama to be a one-term president.” When the GOP is booting the number three House Republican for the sake of better party unity and message cohesiveness ahead of the midterms, it’s hard to see Republican leadership going along with the Biden administration on its top legislative priority. That doesn’t mean there won’t be some path for certain parts of the AJP to get bipartisan support, but it leaves Democrats with little patience for drawn out negotiations before going it alone.
If and when that time comes that Democrats go it alone, the party leaders and rank-and-file need to agree on a spending and deficit philosophy for the AJP and AFP.
Democrats passed the $1.9 trillion American Rescue Plan (ARP) earlier this year that was completely deficit financed yet had 60–70 percent support among voters. Some Republican lawmakers are continuing to promote and take credit for parts of the ARP they voted against. If voters liked going big earlier in the year, it’s a data point in favor of going big again. Early polling for the AJP and AFP is positive, although a little less so than the ARP.
The AJP and AFP spending would be over a decade instead of an immediate stimulus. The CBO estimates over the next decade, the deficit will increase by $12.3 trillion. If Democrats passed the $4.5 trillion from the AJP and AFP without any offsets, it would increase the deficit by 37 percent (ignoring the spending’s impact on GDP, interest rates, etc.). While 37 percent is not nothing, there are many Democrats who see there’s still excess fiscal capacity to spend without requiring a full offset. House Ways and Means Committee Chair Richard Neal (D-MA) views the AJP and AFP as “economic investments” that could have a meaningful return on investment.
Additionally, voters are more open to deficit spending today than they were when President Obama was in the White House. A Gallup poll from March had 49 percent of Americans worrying a “great deal” about federal spending and the budget deficit. That number was at 64 percent a decade ago. A Pew Research poll last month also had 49 percent of Americans who said the federal budget deficit is a “very big problem.” But that broke along party lines — only 31 percent of Democrats and Democratic leaners called it a very big problem vs. 71 percent of Republican and Republican leaners. That’s a marked divergence from the Trump era when both Democrats and Republicans had nearly the same view on how big of an issue the budget deficit was (53 percent for Democrats and 56 percent for Republicans in 2018). When Biden’s skill as a politician is to find the center of the Democratic Party (and country), several signs point towards the deficit not being a top worry for his supporters as of now.
Finally, a willingness to deficit spend saves Democrats the hassle of getting support for politically challenging tax increases. Biden has already conceded on lowering the corporate tax rate, the biggest pay-for for the AJP. The top pay-for from the AFP is an estimated $700 billion in added revenue from increased IRS enforcement. But there’s no certainty about what that number actually is and even if it’s $700 billion, it would not be officially scored as budget savings by the CBO. Then there’s plenty of push back on other tax pay-fors proposed by Biden. Yesterday, 13 House Democrats, including seven of the 32 “frontline” members, wrote a letter to Democratic leadership seeking family-owned farms be exempted from any changes to the step-up in basis. Biden’s AFP included an exemption for family-owned farms and small businesses to delay the taxation if the farm or business is given to heirs who continue to run the business. The US Department of Agriculture (USDA) estimates that 98 percent of farm estates would not owe any taxes at transfer and those that do will be on non-farm assets. That goes with broader estimates that only three percent of families have unrealized capital gains above the $1 million exemption for eliminating the step-up in basis that Biden proposed. But two percent of farmers and three percent of families have outsized influence in the political and lobbying process. Creating further exemptions on step-up could lower the revenue-maximizing rate of capital gains, putting additional downward pressure on treating capital gains as ordinary income for those making more than $1 million. With razor-thin margins, all it takes is a small coterie of Democratic rank-and-file members or a Democratic committee chair to push back in order to gain some concessions in the negotiations.
Once the reconciliation process begins, Biden will likely change his tune on deficits in the face of fewer pay-fors available than he proposed. But there still are economic and political limits to deficit spending. The federal government may have greater fiscal capacity, but the White House is keenly watching for signs of increased inflation. It’s hard to predict the macroeconomic outlook over the next decade, but having progressive tax pay-fors can buoy the progressive spending of the AJP and AFP and protect it from potentially being cut if there’s a need for fiscal moderation in the future. More importantly, it’s the anticipation of inflation and overheating rather than actual inflation and overheating that could create political constraints.
There are people like Senator Joe Manchin (D-WV) who say any spending needs to be paid for. This probably reflects a genuine belief, like Biden and some other moderate Democrats, about the dangers of a ballooning deficit. But it’s also a useful rhetorical tool for Manchin to oppose certain progressive spending in the AJP and AFP. There will inevitably be some spending cuts if Manchin is to come on board the reconciliation process. But Manchin eventually supported the ARP. If the Democratic spending legislation is popular and inflation/deficit concerns are relatively stable, Manchin may find a way to support some deficit spending again.
All of these spending issues will eventually be addressed by Democrats in the legislative road to passage. But like the cicadas who have a lifespan of five to six weeks above ground, this Biden deficit hawk may be short lived.