President Biden’s budget request for fiscal year 2020 projects a $1.8 trillion deficit next year and annual shortfalls of more than $1.3 trillion over the rest of the next decade. Actual deficits could be even larger, writes Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center — and not because of some extraordinarily rosy economic assumptions, as has often been the case in the past. “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,” Gleckman writes.
He explains that Biden’s budget “makes two big assumptions.” One, as we noted last week, is that individual tax cuts in the 2017 Republican tax law will be allowed to expire as currently scheduled at the end of 2025. Biden has pledged not to raise taxes on people making less than $400,000 a year and he may not ultimately want all of those 2017 individual tax cuts to expire. Even if he does, many in Congress won’t. “In reality, Congress may allow some to expire but surely will extend many others,” Gleckman says. “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.”
The other questionable tax assumption in Biden’s budget involves corporate taxes. The budget assumes that his proposal to raise the corporate tax rate from 21% to 28% gets enacted — even as some Democrats have pushed back on that hike and said they’d prefer a 25% rate. “Rough rule of thumb: That three percentage point difference would reduce projected revenue by about $300 billion,” Gleckman says. “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.” But the minimum rate is tied to the base corporate rate, and could ultimately drop to about 18% or lower. “Add it all up and that $2 trillion in new corporate tax revenue is likely to look more like $1.5 trillion or less,” Gleckman says.
His conclusion: The 2031 deficit of 4.7% of GDP projected in the Biden budget is more likely to stay closer to 5% of GDP through the decade because revenues would be lower than forecast in the White House blueprint. Of course, Congress could still change that outlook by scaling back Biden’s spending plans or enacting some unanticipated revenue measures.