Trillions and Trillions

After spending months trying to cobble together enough votes to pass individual pieces of their expensive agenda, congressional Democrats have decided to throw caution to the wind and buy a ticket for the full jackpot.

They have announced an agreement on a budget resolution that includes $3.5 trillion in reconciliation instructions for new tax and entitlement changes. This is in addition to the infrastructure deal being negotiated with Senate Republicans that would include $600 billion in new spending, and an 8.4 percent discretionary spending increase that would raise the spending baseline and thus likely cost $1 trillion over the decade. Another $1 trillion would come from renewing policies that currently use fake expiration dates to hide their long-term cost (after all, no one believes lawmakers will actually allow the child tax credit expansions to expire).

Add it all up, and the Democrats are laying the groundwork to add $6.1 trillion in new spending and tax credits. Including the mostly unnecessary $1.9 trillion “stimulus” bill enacted just four months ago would bring the 2021 binge to a historic $8 trillion over the next decade.

How much is $8 trillion? Enough for Washington to deposit $60,000 into each family’s bank account. Or permanently eliminate the employee side of the payroll tax. Or permanently cut income taxes by one-third. Instead, if Democrats have their way, it will go to a grab bag of expensive government expansions.

Assuming this spending goes on the government credit card (more on this later), $8 trillion in new debt would combine with $17.7 trillion in baseline borrowing already scheduled to fund the federal government, to bring the 2020-2031 budget deficit to nearly $26 trillion. As $2 trillion yearly budget deficits become the norm despite peace and prosperity, the total debt held by the public would top $43 trillion within a decade, or 130 percent of the economy (one-fifth higher than at the end of World War II).

This higher debt will bring higher interest costs. Even conservatively assuming that interest rates over the long term peak at just 3 percent even as the economy strengthens (The Congressional Budget Office assumes a higher rate than that within a few years), this six-month spending spree would, by itself, add $240 billion in annual interest costs to the federal budget every year, forever. That’s $240 billion each year that could otherwise be used to permanently double veterans’ health and income support benefits, triple the federal highway program, or provide an annual $1,800-per-household tax rebate. Instead, Washington would annually send the $240 billion to the bondholders who financed this spending bonanza. It’s a totally avoidable waste of money.

Supporters brag that much of this spending is broadly popular with the American people. That is because everybody loves Santa Claus. In addition to the (still-too-loosely-defined) “infrastructure” of the bipartisan Senate negotiations, Democrats are proposing huge new spending to address climate change, expand Medicare, Obamacare, and public housing, and create new programs for universal pre-K, childcare, college student aid, long-term care, and family leave. Even big business would be bribed with hundreds of billions of dollars in new corporate welfare subsidies. Recent expansions of the child tax credit, earned income tax credit, and child and dependent care tax credits would be extended as well (with most of the long-term costs hidden through one or two-year extensions).

This proposed spending binge—the largest permanent expansion of government in at least half of a century—will continue to remain popular until lawmakers address the elephant in the room: paying for it. The $1.9 trillion March stimulus was not paid for (which would have been acceptable if the economy actually needed the stimulus). The “bipartisan” $600 billion infrastructure agreement secured a handful of Republican senators on the promise that full offsets will be found before the bill comes up for a vote. Yet thus far the parties involved have identified only a series of talking points, gimmicks, and “to-be-determined” offsets that do not remotely approach $600 billion—and even those are now being jettisoned. There is no bucket of $600 billion in non-controversial offsets available, which means Republican senators will ultimately have to decide whether Washington should go deeper into debt to finance a Democratic spending bill. My own experience participating in negotiations as a Senate staffer taught me that exuberant “we have a deal!” press conferences are meaningless until all of the specifics—including whether and how to pay for the deal—have been solved in granular detail.

The same principle applies to the Democrats’ attempts to line up the unanimous support of all 50 Democratic senators (and nearly all House Democrats) for the $3.5 trillion reconciliation bill. Unanimous Democratic support will likely arrive to pass the budget resolution, but that merely gives Congress permission to begin drafting $3.5 trillion in new mandatory spending and tax changes. From there, lawmakers are likely to get bogged down not only in selecting the $3.5 trillion in new benefits (several House Democrats are already demanding $800 billion to remove the SALT deduction cap), but also the thornier question of how to pay for this all.

While some Democratic lawmakers have asserted that much of this new spending need not be paid for, more moderate senators such as Joe Manchin (D-West Virginia) have indicated an unwillingness to add $3.5 trillion to the debt. And in fact, Sen. Mark Warner (D-Virginia) has already declared that Democrats will pay for the entire $3.5 trillion. Politically, this makes sense. As much as voters love new spending and often downplay deficit concerns, the pure sticker shock of adding $3.5 trillion in debt would surely scare off enough moderate voters to peel off a few Democrats—and thus sink the bill. 

Conventional wisdom acknowledges that deficit reduction proposals are extraordinarily unpopular because voters seek to protect their existing spending benefits and avoid new taxes. Yet that does not mean the American people will support legislation to aggressively enlarge deficits. In fact, voters have traditionally supported massive deficit-financed legislation only for temporary economic stimulus, disaster relief, and wars—but not for permanent new benefits. The only legislation enacted this century that added more than $400 billion in new 10-year debt for non-temporary policies (or basic renewals of expiring policies) were the 2001 tax cuts, 2003 creation of the Medicare prescription drug benefit, and 2017 tax cuts. The 2001 tax cuts were enacted during a time of trillions in projected budget surpluses, and the 2017 tax cuts have proved less popular due in part to deficit concerns. Only that $400 billion Medicare expansion enacted 18 years ago came during growing deficits and yet was widely popular. 

But while adding $3.5 trillion in new debt would risk an enormous political backlash, raising $3.5 trillion in offsetting taxes will almost surely prove impossible. This would easily comprise the largest permanent tax increase since World War II, totaling 1.25 percent of the economy. And while progressives have long promised massive new taxes (primarily on upper-income families and corporations), in practice Democrats have been unable to pass any substantial tax hikes in decades. Measured against a current-policy baseline, the only significant tax increase of the past 25 years was the $640 billion one included in Obamacare—and much of these taxes were later repealed in a bipartisan vote. Beyond that, the past 50 years saw tax increases in 1993 (Clinton deficit reduction bill), 1990 (Bush “read my lips” tax hikes), and a few 1980s examples. All of these tax increases ranged between 0.21 and 0.63 percent of GDP, or the current equivalent of between $600 billion and $1,750 billion over a decade (this excludes a larger 1982 tax increase that merely pared back one-third of the previous year’s colossal tax cut). And before that, we need to go back to the Truman presidency for permanent tax increases even half as large as today’s Democrats are considering.

Assurances that these tax hikes will hit only wealthy families and corporations—while popular—may not get them over the finish line. A promise to raise $780 billion through better enforcement of the tax code far exceeds what the Congressional Budget Office deems plausible. The president’s $1.7 trillion in proposed corporate taxes—five times the amount that corporations saved in the 2017 tax cut—is already worrying Democrats wary of returning the U.S. to the highest corporate tax rate in the developed world, and sabotaging American competitiveness abroad. Historic increases in capital gains and investment taxes are also drawing a backlash from the Democrats’ base of coastal investors and Silicon Valley entrepreneurs. Raising taxes on assets passed down to heirs has encountered opposition from farm-state Democrats. None of these provisions has anywhere close to the virtually unanimous Democratic congressional support needed to pass them in reconciliation. As for economic growth revenues, this package is almost certain to reduce long-term growth.

President Biden and congressional Democrats have seemingly grown tired of struggling to hit singles and doubles, and decided to swing for the fences. Right now, they are enjoying their Santa Claus moment of promising their voters trillions of dollars in popular benefits. Yet when lawmakers (and voters) are forced to choose between the largest debt increase and largest tax increase in more than half of a century, they may learn the political and economic limits of free-lunch pandering.

Brian Riedl is a senior fellow at the Manhattan Institute. Follow him on Twitter @Brian_Riedl.