Those of us who have been writing about the federal budgets for too long remember the sad history of presidents trotting out wildly optimistic economic assumptions to explain away growing deficits and debt. It was a tried-and-true way to hide their unwillingness to pay for ambitious spending with too little tax revenue. Former President Trump raised it to an art form.
The budget President Biden proposed last Friday did not rely on unrealistic economics. Indeed, its long-run growth assumptions seem well within the economic consensus. Instead, Biden masked what likely will be the true increases in deficits simply by using standard Washington budget accounting and by assuming that all of his proposed tax increases will become law, when they almost surely will not.
No criticism of Biden here. He is following the rules. But keep the gaps in mind as you read the budget. You are reading the budget, aren’t you?
Two Big Assumptions
We could do this exercise with proposals for temporary tax cuts that Biden really wants to make permanent or with spending. But, for the most part, lets’ stick with the president’s proposed tax agenda.
Biden’s budget makes two big assumptions. The first is that the many individual tax cuts included in the 2017 Tax Cuts and Jobs Act (TCJA) will expire as scheduled by the end of 2025.
Biden proposed only one major immediate change to the individual income tax provisions of the TCJA: He’d raise the top individual income tax rate back to 39.6 percent from 37 percent. That would boost projected revenues by about $132 billion over 10 years.
Otherwise, his budget assumes the TCJA’s individual provisions will continue through 2025 but go away as scheduled starting in 2026.
Lost revenue
In reality, Congress may allow some to expire but surely will extend many others. And there is a lot of money at stake. A back-of-the-envelope calculation based on the Joint Committee on Taxation’s 2017 TCJA revenue estimates, which assume the individual provisions do expire after 2025, suggests extending them could add close to another $800 billion to the debt by 2031.
Biden has vowed to not raise taxes for those making less than $400,000. At least arguably, letting those 2017 tax cuts expire would result in a tax increase for the vast majority of those taxpayers. The debate over whether letting a tax cut expire as scheduled is equivalent to a tax increase has no right answer. But it seems fair to assume that is not an argument Biden will want to have if he runs for reelection in 2024.
Corporate taxes
Biden’s second rosy assumption involves his proposed increases in corporate taxes.
The president would raise corporate income taxes by about $2 trillion—excluding about $300 billion in clean energy tax breaks.
Of that $2 trillion, about $860 billion would come from raising the corporate income tax rate from 21 percent to 28 percent. But Biden already appears to have conceded that Congress won’t raise the rate higher than 25 percent. Rough rule of thumb: That three percentage point difference would reduce projected revenue by about $300 billion.
Similarly, Biden’s budget assumes about $500 billion from changes to the taxation of US-based multinational corporations. The biggest single provision would effectively increase the global minimum tax on multinationals from 10.5 percent to 21 percent.
However, that rate is based on a formula tied to the corporate tax rate. If Congress approves a 25 percent corporate rate, the minimum tax rate would fall to roughly 18 percent. And it could be even lower. In separate negotiations with the OECD, the Treasury has proposed a worldwide minimum tax as low as 15 percent.
Biden’s budget also includes a separate minimum tax on the “book” income large corporations report to their shareholders. The plan also is unlikely to pass Congress and would be extremely difficult to implement if it did.
Add it all up and that $2 trillion in new corporate tax revenue is likely to look more like $1.5 trillion or less.
Front-loading
Much of Biden’s budget is front-loaded. Thus, it projects deficits as high as 5.5 percent of Gross Domestic Product (GDP) in 2025, gradually declining by 2031. But that assumes several new or extended tax preferences will expire during the budget period—something neither Biden nor congressional Democrats support.
Of course, any president’s budget will assume that all its provisions pass. And Congress could always scale back Biden’s spending plans, though history suggests lawmakers are more averse to raising taxes than trimming spending.
Biden’s budget already projects a 2031 deficit of 4.7 percent of GDP and a national debt that exceeds the size of the overall economy that year. A more realistic assessment suggests the deficit will remain closer to 5 percent of GDP through the decade unless Congress scales back Biden’s ambitious new spending plans. Not because the economy will grow more slowly than the White House projects, but because policy changes will result in lower actual revenues than this budget assumes.