As President Biden prepares to take a national victory lap heralding his $1.9 trillion American Rescue Plan stimulus package, his administration is already eyeing its next ambitious move. Talk of a multi-trillion-dollar infrastructure package—one promising to create jobs, address climate change, and invest billions into research and development—predates Biden’s swearing in. With Democrats in control of both chambers of Congress, the table is set for the White House to go big with a major proposal.
The question, for many observers, has been how the Biden administration plans to pay for such a massive piece of legislation. For all the talk about how budget deficits may not matter, the fact remains that even before Biden signed the American Rescue Plan into law last week, the federal deficit was on track to hit $2.3 trillion in the 2021 fiscal year—more than 10% of the U.S.’s total gross domestic product and the second-highest debt-to-GDP ratio since World War II, according to the Congressional Budget Office. After hitting 100% of GDP in 2020, the total federal debt held by the public is on track to equal 107% of GDP by 2031.
In the long run, that sort of borrowing could conceivably have far-reaching economic consequences, from hurting the U.S. government’s sovereign credit rating to triggering inflation and spiking long-term interest rates. For now, inflation has stayed in check and interest rates remain historically low—a dynamic that fiscal doves say justifies increased borrowing as the U.S. seeks to spend its way out of the current, coronavirus-induced economic downturn.
“It is true that the potential harm of deficits has been overblown a lot over the years, and that [the government previously] passed up a lot of opportunities to make investments that would have helped a lot of people,” according to Steve Wamhoff, director of federal tax policy at the Institute on Taxation and Economic Policy (ITEP). “Interest rates are low, and if we have projected economic growth that [outweighs] our interest rates, deficits may not be a problem.”
But while disregarding deficits to pass urgent economic stimulus is one thing, continuing to borrow heavily to fund enormous new federal programs, like Biden’s mooted infrastructure package, would be far less realistic.
“The real issue is, at what point do things need to be paid for?” Wamhoff notes. “If we’re going to create new programs that are really large, you’re going to have to raise revenue to pay for them.”
As such, indefinite deficit spending was always an unlikely proposition. On the campaign trail, Biden pitched a significant tax proposal that would increase federal revenues by as much as $2.1 trillion over the next decade, according to the Tax Policy Center. In effect, the plan would seek to reverse much of what President Trump enacted through the Tax Cuts and Jobs Act of 2017; it would raise the corporate tax rate to 28% (from the current 21%), increase taxes on U.S. firms’ foreign profits, and also raise income taxes on individuals earning more than $400,000 a year.
Through the first two months of the Biden administration, however, the White House has been virtually silent on its tax policy; most observers have been eyeing the release of the President’s fiscal 2022 budget proposal, which will likely be delayed until next month, for a better idea. But Monday provided the clearest indication yet of where things stand, as Bloomberg reported that behind the scenes, the administration’s economic team is fleshing out a tax plan broadly in line with Biden’s campaign pitch.
Assuming the finished product ends up closely resembling what’s been reported, it’s unlikely that Democrats will succeed in garnering much, if any, bipartisan support for an array of tax hikes that would be anathema to Republican fiscal policy. But should Biden and top congressional Democrats succeed in getting their own party behind the proposal, they wouldn’t need any Republican support thanks to the Senate’s budget reconciliation process—which was just recently deployed to pass the American Rescue Plan with a filibuster-proof, simple Democratic majority.
“Biden has a good understanding of how the Senate works, and he recognizes that a closely split Senate means you’ve got two paths to go down: the standard path requiring a 60-vote margin and reconciliation,” according to Will McBride, vice president of federal tax and economic policy at the Tax Foundation. “Outside of reconciliation, I don’t think we’ll see any tax increases.”
Keeping all 50 Senate Democrats on the same side has already proven a tricky task, as evidenced by how moderates like Joe Manchin of West Virginia and Kyrsten Sinema of Arizona balked at some of the more progressive elements of the American Rescue Plan (most notably, a increase of the federal minimum wage to $15 an hour.) But even Manchin has indicated that he would support tax increases to fund an infrastructure package as costly as $4 trillion; in fact, he deemed tax hikes a requisite for any such measure, citing concerns about the deficit.
Should the President get the rest of the Democratic caucus on board with his vision of a massive infrastructure bill funded by higher taxes on corporations and wealthy individuals, Biden could have yet another legislative victory on his hands—one even bigger and more significant than his coronavirus stimulus bill, with further-reaching economic consequences that could resonate for years to come.
And while such an aggressive attempt by a Democratic President to raise taxes would usually draw ample scrutiny—including accusations of “taxing and spending” from Republican opponents—Biden may well be operating in a different political environment, one with more support for redistributive fiscal policies during a time of economic inequality and hardship.
As ITEP’s Wamhoff notes, raising taxes on the wealthy and corporations is exactly what Biden and many of his fellow Democratic presidential candidates ran on during the 2020 campaign.
“When you looked at the Democratic primary, everyone was talking about raising trillions of dollars in progressive ways,” he says. “Biden really did campaign on raising taxes on rich people and corporations, and he won doing that. There are a lot of people who really do support progressive tax increases because they think it’s the right thing to do, and that corporations and the wealthy aren’t paying their fair share.”
