This is a high risk moment for the long term economic viability of the United States. We are exhausted and disoriented by the Coronavirus and the spending that has been undertaken to blunt the pandemic and stimulate economic activity. In about a year Nancy Pelosi's House has generated "relief" bills for $2.2 trillion and $.9 trillion signed by President Trump, and a bill for $1.9 trillion signed by President Biden. For reference, the total value of all goods and services produced in the United States in a year is about $21 trillion, and our national debt is now about $28 trillion. A prudent person would think that this is a good time to focus on implementing the $5 trillion in new spending, eradicating the virus, and planning how to avoid future disasters. Not so for Ms Pelosi who takes to heart Rahm Emanual's maxim to never let a good crisis go to waste.
The new $2 trillion American Jobs Plan, announced by the White House on the day before April Fool's Day, contains everything that Bernie Sanders, Alexandria Ocasio-Cortez, or Nancy Pelosi could think of - a bit of traditional infrastructure to provide cover, a large amount of spending to usher in a green utopia in which all good investments are subsidized, and a set of new or greatly expanded programs to make society more fair. Let's try to untangle the content from the marketing.
"Infrastructure" takes on a ridiculous meaning to include: popular basics like roads, ports, bridges, the electric grid, and water systems which are investments to sustain the economy and society over long time spans and which are generally seen as government responsibilities (28%); other discretionary "upgrades" to a wish list including AmTrack expansion, broadband expansion, retrofitting of housing and schools, 500,000 electric vehicle charging stations, and building in "climate change resiliency" (37%); a new ongoing social spending program of wage subsidies for caregivers (20%); and greatly expanded support for manufacturing and research and development with a focus on climate change, workforce retraining, and semiconductors (15%).
In a normal world this agenda would be broken into dozens of components and the various Congressional committees would prioritize the most important (and politically attractive) within a broad budget framework. In the Democratic world of 2021, the first question is whether the Senate parlimentarian will allow the mess to be called a modification to the 2021 budget, and therefore appropriate for reconciliation which requires only a simple majority to pass. The second is whether Nancy Pelosi can hold together her majority of six in the House and Chuck Schumer can hold together his caucus of 50 in the Senate to pass the funding necessary to implement the Left's new vision - most likely in at least two tranches.
The shell game of how to pay for this transformation of America is equally disappointing. (The spending increases are positioned as a 10 year plan - on average $200 billion per year; the corporate tax increases $2.5 trillion over 15 years or $167 billion per year.) As a starting point, in the economic boom year of 2019 we had a deficit of $984 billion - about 4.6% of GDP. All of the current discussion of tax increases starts with the assumption that the ingoing deficit rate is OK, with the debate being about how much of new spending needs to be covered by increased taxes. That said, there will be (and should be) increases.
- The Trump tax cuts of 2017 reduced the top corporate rate from 35% to 21%; Biden proposes to increase it to 28%. Janet Yellen is taking on a global effort to set a minimum corporate rate of 13.5% to reduce the attractiveness of tax haven shopping among global companies. Efforts will be made to capture companies who still manage to pay no taxes with a minimum 15% tax on reported profits, . The discussion is reasonable, but in the context of ongoing deficits and vastly increased spending, it is under what is necessary.
- Personal taxes will also go up, but Biden has committed that increases will not impact couples earning under $400,000. Concepts under discussion for high earners include increasing the top rate from 37% to 39.6%; capping itemized deductions; extending Social Security taxes from the current limit of $142,800; taxing capital gains at 39.6% rather than 20%; lowering the estate tax exemption from the current $11.7 million and increasing the maximum rate from 40% to 45%. There is no appetite for Elizabeth Warren's proposal to tax accumulated wealth in addition to income, and there is little appetite to change the limit of a $10,000 deduction for state and local taxes. The impact will be gentle.
Joe Manchin has made some noise about a 28% corporate tax rate being too high, and he and Kyrsten Sinema of Arizona have committed to retain the 60 vote majority for non-budgetary items like gun control, voting rights, immigration, and the minimum wage, but much of the damage will be done through reconciliation , which allows a simple majority to approve changes to the current year's budget. Thus will we get substantial federal government expansion and increased deficits with virtually all Democrats supporting and virtually all Republicans opposing. One can only reflect how much difference one Senate seat in Georgia made.
bill bowen - 4/8/2021