In his speech to Congress, President Joe Biden declared his ambitions for a country on its way back from the COVID-19 pandemic. “Now, after just 100 days, I can report to the nation: America is on the move again,” he said. “Turning peril into possibility. Crisis into opportunity. Setback into strength.”
Barely three months into his presidency, Biden outlined his third huge fiscal proposal — a package of nearly $2 trillion to be spent over 10 years on child care, education, paid leave and expansions of the earned-income and child tax credits. This comes on top of the $1.9 trillion pandemic-relief law already passed by Congress and the president’s $2.3 trillion plan for new spending on infrastructure.
By any standard, this is an extraordinarily bold agenda. Is it affordable? And is it wise?
Biden’s intentions are admirable. He’s right to prioritize opportunity for the poor and disadvantaged — a consistent theme. He’s also right to match long-term spending increases with plans to raise taxes, because most of these outlays, however desirable, won’t pay for themselves. And it makes sense, as Biden proposes, to target those best able to afford it, hence pushing back against the trend of worsening economic inequality. In particular, he proposes roughly doubling the top rate of tax on capital gains and dividends to 43.4% (including the 3.8% Medicare tax introduced by President Barack Obama).
These goals are worthy — but Biden’s blizzard of proposals nonetheless gives cause for concern.
Spending on such a scale without waste is a bigger challenge than the president appears to think. And when it comes to taxes, the promise that the richest 0.3% will pay for everything is implausible bordering on dishonest. The danger is that the gains for the intended beneficiaries will be less than hoped, and the substantial cost won’t in the end be confined to a sliver of people at the top.
Value for money in public spending demands minute attention to detail. Promises to spend half a trillion here and half a trillion there suggest the outlay is itself the purpose — the bigger, the better — when the goal ought to be what the spending will buy, preferably at least cost. It’s worth noting that many aspects of Biden’s plans are actually expensive by design, for instance requiring federal contractors to pay higher-than-market wages, strengthening the bargaining power of organized labor, and raising new import barriers.
Done right, spending on infrastructure can boost private investment and growth; done wrong, it builds bridges to nowhere. Universal access to broadband internet is eminently desirable; it might be achieved economically and efficiently, or at inordinate cost. Two years of tuition-free community college could mean expanded training in skills demanded by employers, hence higher incomes and faster growth; or it could cause delayed entry into the labor force with loss of wages and no offsetting benefit. With so many American schools failing their students, fixing K-12 education is a more compelling priority.
In all these areas, management is everything. “Think of a number and double it” isn’t good fiscal policy.
Biden’s plans to pay for it all are problematic, too. The emphasis on squeezing the rich has led the administration to propose sharp increases in taxes on capital. Economists are divided on what this will mean for saving and investment, but such a big increase would leave the U.S. as an outlier among rich countries. At the very least, it’s a gamble.
It’s also unclear how much revenue these increases would yield. Again, it depends on the details. Biden’s proposal would, it’s true, narrow the opportunities for the rich to avoid tax. (Unifying the top rates on earnings and capital gains would close the so-called carried-interest loophole, for instance.) But while tax avoidance would be harder, the return on tax avoidance would be very much bigger. America’s vastly complex tax system isn’t lacking in other opportunities, especially for people rich enough to deploy the necessary resources. If the yield turned out to be lower than the administration predicts, the promise to transform America solely at the expense of the wealthy would be hollow.
Biden’s incautious ambition has one further drawback. It abandons hope of reaching consensus on aspects of fiscal policy where, even now, it might still be possible. Many Democrats think that seeking agreement with Republicans is pointless, merely a formula for delay and paralysis. But they ignore that modest-seeming steps sustained from one administration to the next are more supportive of growth and innovation than a policy pendulum that swings from one extreme to the other every four years. Instability breeds uncertainty, suppressing investment and growth. It’s much too soon to give up on bipartisanship — and it’s a shame to see Biden, of all people, throw in the towel.