Biden’s budget is why the debt ceiling exists in the first place

The debt ceiling debate takes a strange turn after President Biden demands something of a duel among budgets without realizing that his own $6.9 trillion monstrosity, which would more than double the entire budget of just six years ago, is why the debt ceiling exists in the first place.

Earlier this week, the Republican Speaker of the House, Kevin McCarthy, sent a letter to President Biden urging him to begin more robust negotiations over a potential debt ceiling increase.  Writing, “with each passing day, I am incredibly concerned that you are putting an already fragile economy in jeopardy by insisting upon your extreme position of refusing to negotiate any meaningful changes to out of control government spending.”  The Speaker proposed several potential measures such as reclaiming unspent coronavirus relief funds, a reasonable proposition given the pandemic is over, and strengthening work requirements for social programs, a more controversial one.  For his part, the President rejected these proposals outright and demanded Republicans provide a comprehensive budget, presumably similar to his own from earlier in the month.  “It’s time for Republicans to stop playing games, agree to pass a clean debt ceiling bill, and quit threatening to wreak havoc on our economy. And if they want to have a conversation about our nation’s economic and fiscal future, it’s time for them to put out a Budget – as the President has done with his detailed plan to grow the economy, lower costs, and reduce the deficit by nearly $3 trillion,” the White House wrote in a statement.  In other words, allow me to wrack up more debt, and then we will consider talking at some point. This position is, of course, at odds with their long standing insistence that the debt ceiling reflects promises that were already made and need to be kept, rather than what might or might not happen in the future.

The reasoning behind insisting upon a “clean” debt ceiling bill is that the money has already been spent and committed to by previous Congresses and Presidents.  Refusing to authorize an increase is seen as reneging on those promises.  One can choose to accept that line of reasoning or reject it, but that it is based on the past and not the future is undeniable.  As progressive economist Paul Krugman put it earlier this year, “A few days ago I received an automated text from my bank. For some reason the bank’s algorithm flagged a valid charge on my debit card as potentially questionable; the text asked me to verify the purchase.  In a rational world raising the federal debt limit would be regarded as the equivalent of typing ‘1’ in response to that text — acknowledging a purchase that you have already made.”  President Biden, however, is suddenly changing direction and demanding a showdown over the budget, that is over purchases that have yet to be made to use Mr. Krugman’s analogy.  At the same time, he seems quite unaware that his budget proposal is precisely why the debt ceiling exists in the first place.  What other remedy is there for a President who refuses to accept anything resembling fiscal sanity, continues to insist on ever more spending even after years of record breaking outlays, all while the country has more debt than at any time since World War II?  The United States has piled on $7.3 trillion since the start of the pandemic alone, almost 25% of the total $31 trillion in just three years.  To put this in perspective, debt as a percentage of Gross Domestic Product previously peaked at 119% in 1946.  As late as 1981, it had been reduced to a mere 31%, but then it began an inexorable climb.  It now stands at around 123% of GDP, the highest in history, but some still want to keep adding on more, even after we have done exactly that in recent years.

Meanwhile, the entire federal budget was $3.29 trillion five years ago, a somewhat quaint figure considering it ballooned to $4.17 trillion last year, an increase of almost 27%, and is expected to climb close to another $500 billion by the end of the fiscal year in October. If the President has his way, it would go much higher than that.  The budget proposal he is touting and demanding a response to puts the number at a truly incredible $6.9 trillion, more than doubling total government spending in just 6 short years.  The President claims he can maintain this level of spending while reducing the deficit and the debt by increasing taxes some $4.8 trillion over 10 years, but those numbers are only achieved by assuming levels of economic growth that no one believes are possible.  For example, he uses a figure of 0.4% growth this year, 2.1% growth next year and 2.2% growth by the end of the decade.  The nonpartisan Congressional Budget Office, on the other hand, projects a much more dismal 0.1% this year, a slightly better 2.5% growth next year, and only 1.7% by the end of the decade.  Numbers in line with these cause the entire façade to fall apart and the deficit and debt keep on climbing.  “Debt under the President’s budget would grow to a new record as a share of the economy over the next decade,” the Committee for a Responsible Federal Budget wrote in an analysis.  “This budget falls well short of the deficit reduction needed to put the nation on a sustainable fiscal path,” they continued, estimating the “deficit reduction” measures would need to be close to three times as large to have the necessary impact and clearly identifying out of control spending as the root cause.  “We are disappointed that the spending cuts in this budget – given the massive spending growth in recent years – amount to less than 1 percent of the budget and are coupled by four times as much in spending increases,” the CRFB continued.  The Biden Administration, perhaps needless to say, asserts that these spending increases will benefit the middle class, but the fact remains that no President in US history has ever proposed both the largest tax increase and spending increase at the same time, much less while claiming to be a deficit hawk.

This new spending comes in every form imaginable, from increased child tax credits and increased subsidies for the Affordable Care Act to new spending on child care, housing, college, home energy and water.  Basically, you name it, and they want to spend something on it regardless of the impact.  In a truly bizarre turn of events, there are even subsidies on top of existing subsidies, some of which haven’t even been spent yet.  For example, the CHIPS Act passed last year, which was supposed to bring high technology manufacturing back to the United States yet so far has done precisely nothing, is showered with another $21 billion, almost half the initial proposed cost of the program.  “The Budget provides almost $21 billion in discretionary spending for CHIPS and Science Act-authorized activities,” the White House wrote when describing the budget.  “This funding includes $1.2 billion for the CHIPS and Science Act-authorized Directorate for Technology, Innovation, and Partnerships to help accelerate and translate scientific research into innovations, industries, and jobs, as well as $300 million for NSF’s Regional Innovation Engines program to galvanize use-inspired research, technology translation, and workforce development,” without mentioning that none of these things even exist and no one knows if they will be even remotely effective.  There are also billions more for schools, even though billions were already spent and billions remain unspent from the coronavirus relief legislation passed in 2021.  “The Budget provides $20.5 billion for Title I, a $2.2 billion increase above the 2023 enacted level, delivering critical funding to 90 percent of school districts across the Nation and helping them provide students in low-income communities the academic opportunities and support they need to succeed.”  There are additional billions on clean energy, after they haven’t even spent the hundreds of billions in the so-called Inflation Reduction Act.  “The Budget invests $4.5 billion in clean energy across America,” and “$16.5 billion in climate science and clean energy innovation. The Budget includes $3.5 billion of the $8.8 billion total for DOE’s Office of Science and $1.6 billion at NSF, and makes advancements toward the CHIPS and Science Act authorizations, including $1 billion for fusion, the largest ever investment in the promise of a clean energy power source.”

President Biden insists that the rich and their massive corporations will pay for all this with enough left over to reduce the deficit, but, once again, a closer look reveals a much murkier and more troubling picture.  These include higher corporate tax rates, higher marginal tax rates on individuals, increased taxes on capital gains, a brand new minimum tax on high earners, and increased Medicare taxes.  The corporate tax rate would go up by a whopping 33%, rising from 21% to 28% to a level higher than communist China, making their 25% corporate rate seem downright reasonable.  Of particular interest is a new, never before tried scheme to tax income that doesn’t even exist yet in the form of a levy on unrealized capital gains for wealthy families.  The proposal is so complicated that the Tax Foundation, the nation’s largest tax policy non-profit, had to use a chart to describe how it would work.  “For example, consider a household with net wealth of $200 million, $5 million in ordinary income, $10 million in accumulated unrealized capital gains from a privately held company, and an ordinary tax liability of $1.8 million in 2023 (see accompanying table). When including unrealized capital gains as income, the household’s effective tax rate is 12 percent, below the proposed 20 percent minimum.  To increase their effective tax rate to 20 percent, the household must remit an additional $1.2 million in tax ($3 million in taxes paid with a $15 million income inclusive of unrealized gains). The $1.2 million could be paid in equal installments over nine years (for capital gains moving forward, tax owed could be paid over five years) and would be credited against future capital gains tax liability on the asset when sold.”  Of course, most average people will be unconcerned about the impact on a household with a net worth of $200 million, but where do you think this money — which they have not made yet and do not have directly on hand — will come from?  In many cases, they will have to sell an asset.  What happens when every rich person in the company starts selling stock during tax season?  The value of all stocks goes down.  Who really takes the hit?  You and your 401K or IRA.

Thus, the Tax Foundation concluded, “Biden’s proposal would take the tax code in the wrong direction by imposing a complicated tax on a narrow segment of high-earning households in a way that’s never been tried, adding new compliance and administrative challenges for an already overburdened IRS while weakening the U.S. economy by raising the tax burden on U.S. saving and entrepreneurship.”  Overall, they expect these proposals to move every major economic indicator in the wrong direction, reducing GDP by 1.3%, wages by 1%, and eliminating 335,000 jobs over ten years while increasing the deficit, but even this is uncertain because of various gimmicks and never-before-tried schemes.  “The actual deficit reduction is highly uncertain, as at least $1 trillion of the estimated reduction comes from untested revenue sources (e.g., the billionaire minimum tax and UTPR). Further, if certain policies discussed in the budget were extended, it could wipe out all of the projected deficit reduction, while still harming long-run economic output.”  One of these gimmicks is claiming to work with Congress to ensure the 2017 Tax Cuts and Jobs Act remains in place for low and middle income Americans.  As the Biden Administration put it, they “will work with the Congress to address the 2025 expirations” and he “supports additional reforms to ensure that wealthy people and big corporations pay their fair share, so that America pays for the continuation of tax cuts for people earning less than $400,000 in a fiscally responsible manner.”  The budget, however, does no such thing and jacks up tax rates for everyone starting in 2026.  Putting this another way, they are promising two completely opposite things – the current tax rate for you and your family AND a massive tax increase on you and your family to achieve the deficit reduction.  The difference between the two is only a supposed $1.4 trillion, but what’s that between friends?

Ultimately, it is difficult to conclude the President’s budget is anything more than a fantasy at best or a pack of lies at worst, which brings us back nicely to the purpose of the debt ceiling in the first place.  We have spent more money, by far, over the past few years than any country in the history of the known universe, and yet our President proposes we spend much, much more despite rampant inflation and slow economic growth.  Many of the members of Congress and multiple Presidents who spent this money by passing and signing pork festooned bills are no longer in office and cannot be held accountable for their profligacy.  The debt ceiling is the only mechanism that exists to restore some semblance of fiscal sanity, and President Biden’s budget is illustrative of precisely why that is so.  Perhaps nothing could illustrate it better than a family who just embarked on a massive spending spree, took out a new mortgage on their home, placed a lot of risky bets that haven’t paid off yet, and still insist on more, doubling down on bets that might never come in.  Republicans should gird themselves for a battle they must win, for all of our sakes.


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