Dems' Spending Bill Will Add to Deficit, CBO Says

DC: Speaker of the United States House of Representatives Nancy Pelosi (Democrat of California) weekly press conference
CNP
By Yuval Rosenberg

Happy Thursday! House Democrats plan to
vote on their $1.85 trillion Build Back Better package of social
and environmental programs this evening. Party leaders expressed
optimism throughout the day that they’ll be able to pass what would
be the largest expansion of the nation’s safety net in decades —
even as they still waited for a final cost estimate for the
legislation from the Congressional Budget Office. That estimate
landed a short time ago.

Here’s the latest:

House Dems’ Build Back Better Bill Would Add
$160 Billion to Deficit: CBO

The Congressional Budget Office on Thursday estimated
that, despite promises from President Joe Biden and others in his
party that their Build Back Better plan would be fully paid for,
the legislation would add about $160 billion to budget deficits
over the next 10 years — with a $750 billion gap in the first five
years, a result of the front-loaded nature of the spending plans
that Democrats made temporary to keep costs low.

The budget scorekeeper said that the plan would actually
increase deficits by $367 billion through 2031, but that was “not
counting any additional revenue that may be generated by additional
funding for tax enforcement.” CBO projected that those additional
revenues from beefing up the Internal Revenue Service would total
$207 billion over 10 years — far less than the $480 billion the
White House had projected — bringing the overall deficit impact to
$160 billion.

The new numbers appeared unlikely to derail House
Democrats’ plans to approve the bill. “At the close of the debate,
all that remains is to take up the vote – so that we can pass this
legislation and achieve President Biden’s vision to Build Back
Better!” House Speaker Nancy Pelosi (D-CA) said in a letter to
colleagues Thursday afternoon.

And Treasury Secretary Janet Yellen said in a statement
Thursday evening that, when factoring in her department’s analysis
of the proposed IRS investments, the legislation “is fully paid
for, and in fact will reduce our nation’s debt over time by
generating more than $2 trillion through reforms that ask the
wealthiest Americans and large corporations to pay their fair
share.”

Using the Biden administration’s projection for revenue
from the IRS plan would result in a roughly $113 billion reduction
in deficits over the next decade.

Budget hawks disagree, though, arguing that the CBO
analysis means that Democrats should find $160 billion in cuts or
revenue. “They should also drop the arbitrary sunsets and gimmicky
SALT-related offsets. At an absolute minimum, they should make a
credible commitment not to extend any parts of the bill without
paying for them as well,” said Maya MacGuineas, president of the
Committee for a Responsible Federal Budget, which has found that
making the temporary parts of the bill permanent would about double
its cost, potentially adding $3 trillion to deficits.

The White House's Tax Battle With the CBO

The new CBO analysis projects that the Democrats’ plan to
invest $80 billion over 10 years in beefing up the Internal Revenue
Service and boosting the agency’s tax enforcement would generate
$207 billion in increased revenues, decreasing deficits by a net
$127 billion through 2031.

As expected, that’s far less than the $480 billion in
revenues — and net $400 billion — that the Biden administration has
projected. But the White House has challenged the budget office’s
methodology for estimating the effects of beefed-up IRS
enforcement, arguing that its own projections are more accurate and
pointing to other experts who predict even greater
returns.

The dispute, as Politico’s Brian Faler
writes, “largely boils down to a single question:
How afraid will rich people be of a newly empowered tax collector?
… It’s an inherently tough topic because it means predicting how
wealthy people and corporations will perceive the IRS in the
future.”

The administration has projected that the $400 billion in
additional revenue would include $240 billion expected to flow to
the Treasury from increased audits of corporations and the rich and
another $160 billion that could result from greater compliance as
people adjust their behavior in response to the IRS’s new
muscle.

The Congressional Budget Office projects far less fear, and thus
far less revenue over time, than Treasury officials do. “There’s
other analyses that put a lot of weight on the idea of deterrence —
that if people know that the IRS is doing more and auditing more
that other people then pay more of their taxes,” CBO director
Phillip Swagel said this week. “The research literature on
deterrence, I’d say, is very mixed.”

CBO also says that corporations and the wealthy, in particular —
the very crowd Democrats are targeting — will not be deterred from
trying to avoid taxes.

The White House has gotten support for its position from some
economists and tax experts, including former Treasury secretary
Larry Summers, who has been critical of the Biden administration on
other aspects of economic policy, most notably inflation. In a
Washington Post op-ed Thursday, Summers backs the administration's
view that the IRS plan would generate more revenue than CBO
projects — and he argues that Treasury’s estimates are likely too
conservative as well, pointing to research on the tax gap that he
and others have done.

Summers says that the White House’s $400 billion revenue
estimate represents just 5.7% of the tax gap — the difference
between what is owed and what gets collected — over the next 10
years. “That modest gain is a more-than-reasonable expectation
given the starting point,” he writes. “In general, I believe policy
should be set on the basis of official scorekeeping by nonpartisan
scorekeepers. But, in this case, it would be irresponsible to not
recognize that the CBO estimate for tax-compliance efforts is
conservative to the point of implausibility.” (Read Summers’s full
piece
here.)

The bottom line: House Democrats can only afford to lose
three votes as they try to pass the Build Back Better Act — and
even if they succeed tonight, the legislation still faces an
uncertain fate in the Senate, where Joe Manchin (D-WV) or other
lawmakers may insist on substantial changes.

Estate Tax Revenues Plunge, Even as Wealth Soars

Revenues from the federal estate tax have fallen by 50% in just
two years, according to new data from the IRS reported by
Blomberg News.

In 2018, about 5,500 families paid more than $20 billion in
estate taxes. In 2020, the IRS collected about $9.3 billion from
1,275 families.

“The dramatic decline – to the point where the tax is paid by
0.04% of dying Americans – is largely the result of the tax
overhaul enacted by Republicans in 2017, which doubled the amount
the wealthy can pass to heirs without triggering the levy,”
Bloomberg’s Ben Steverman writes.

Estate tax revenue is expected to continue to decline, despite
the surge in dynastic wealth in the country. Although Democrats
have outlined various changes that would reduce exemptions and
close loopholes in the tax, none of those proposals survived in the
Build Back Better bill following resistance from moderates in the
party.

How a Minimum Tax Would Affect Major US Companies

In the latest version of the Build Back Better bill, Democrats
are proposing a 15% minimum income tax on large businesses, part of
an effort to offset the plan’s $1.85 trillion cost by increasing
tax revenues from the wealthy and corporations. According to a

report released Thursday by Sen. Elizabeth Warren
(D-MA), such a tax would force at least 70 major U.S. companies
that paid less than 15% in income tax in 2020 to pay quite a bit
more, generating an estimated $22 billion in federal revenues in
just one year.

“America’s largest corporations have rigged the tax code in
their favor, employing armies of lobbyists and accountants to write
and abuse the rules so they can avoid paying their fair share of
taxes,” the report charges.

In one example cited in the report, DISH Network reported $2.6
billion in profits in 2020 and paid its chairman almost $95 million
but paid no federal income taxes — and got a $231 million tax
refund to boot. In another example, defense contractor Northrop
Grumman made $3.7 billion, but paid an effective tax rate of just
6.7%, far below the standard tax rate of 21%

“These are not isolated examples,” the report says. “Year after
year, far too many giant corporations report billions in profits to
their shareholders and then tell the U.S. government that they owe
nothing come tax time.”

How the minimum tax would work: The 15% minimum tax would
apply to “book income,” which companies report to their
shareholders and is typically larger than the number they report to
the IRS. Companies often reduce their reported incomes using
various deductions and credits, thereby reducing the taxes they
owe.

According to the Joint Committee on Taxation, such switching to
a minimum corporate tax of 15% would produce $319 billion in
revenue over 10 years.

A problem for corporate investment? Imposing a minimum
tax on book income would raise more federal revenues, but could
have a negative effect on business investment, according to
Thornton Matheson and Thomas Brosy of the
Tax Policy Center.

Under such an approach, companies would lose many of the tax
credits associated with depreciation, which is a key component in
how many firms in the utilities, transportation and manufacturing
sectors evaluate future investments. In their analysis, Matheson
and Brosy found that companies that invest heavily in equipment and
R&D would likely reduce those investments under a minimum book
tax regime.

By comparison, an increase in the corporate tax rate to 25% — a
Democratic proposal that was replaced in the spending bill by the
minimum corporate tax — would raise federal revenues but have no
negative effect on investment decisions.

“Given that the corporate tax base now consists mostly of rents
and that share ownership is skewed toward the wealthy, a rate hike
would have been both efficient and progressive,” Matheson and Brosy
say. “Despite its lower headline tax rate, the book minimum tax may
be more likely to undermine investment.”

Send your feedback to yrosenberg@thefiscaltimes.com.

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