Deficit Will Hit $3 Trillion — Again — This Year

Plus, the House passes a huge infrastructure bill  [The Fisc](   By Yuval Rosenberg and Michael Rainey 130 Countries Back Global Minimum Tax in Big Win for Biden Administration A group of 130 nations has agreed on the broad outlines of a global minimum tax on corporations, a major milestone in the Biden administration’s effort to overhaul the tax system and generate more revenues for domestic spending. In a [statement]( Treasury Secretary Janet Yellen said the agreement marks a “historic day for economic diplomacy” that will help ensure that corporations pay their “fair share” to support investment in public goods like infrastructure and education. “For decades, the United States has participated in a self-defeating international tax competition, lowering our corporate tax rates only to watch other nations lower theirs in response,” Yellen said. “The result was a global race to the bottom: Who could lower their corporate rate further and faster? No nation has won this race.” The Organization for Economic Co-operation and Development, which hosted the negotiations, said that the plan could generate about $150 billion a year in new tax revenues. A key part of the Biden agenda: President Biden has proposed raising the domestic corporate tax rate, from 21% to 28%, and the White House is hoping that a global agreement on minimum taxes would help prevent U.S. companies from fleeing in search of lower rates. Plenty of work left to do: The agreement means that the 130 countries, which include all of the advanced Group of 20 nations, will seek to pass laws that require multinational corporations with revenues of at least $24 billion to pay a minimum tax of 15% on earnings in each nation in which they operate. But many technical details still need to be hammered out, and resistance to the tax plan could slow or derail the process in any number of countries. In addition, several key players in the current international tax reduction system, including Ireland and Hungary, have not signed on, though the agreement attempts to address the problem of non-participation by billing parent companies for the taxes below the minimum paid in tax haven jurisdictions. Opposition to the plan could be fierce in some countries, not least in the U.S. The Wall Street Journal editorial board recently [dismissed]( the idea of a “global race to the bottom” in corporate taxation as a “figment of the progressive imagination” that threatens to undo years of pro-business tax reform. Taking a slightly different tack, Sen. Pat Toomey (R-PA), who sits on the Banking, Budget, and Finance committees, recently embraced the “race to the bottom,” but not in the way Secretary Yellen would necessarily understand. “‘Race to the bottom’ is the way the Biden administration describes competition among developed countries to get to a tax code that attracts investment and maximizes growth,” Toomey [said](. “It is a race we should be leading, not trying to prevent.” What’s next: G20 finance ministers are expected to sign the agreement in Venice next week, and national leaders are expected to affirm it at a summit in October, with the goal of implementing the new system in 2023. Budget Deficit Will Hit $3 Trillion in 2021: CBO The U.S. federal budget deficit will come to $3 trillion in fiscal year 2021, according to the [latest estimate]( from the Congressional Budget Office. The new projection is about a third higher than the CBO’s previous analysis from February. Driven by massive emergency spending in response to the Covid-10 pandemic, the deficit in 2021 will equal 13.4% of GDP – the second highest level since the end of World War II. Only last year’s level of 14.9% of GDP was higher. In dollar terms, the 2021 deficit will be about $130 billion smaller than in 2020. “The economic disruption caused by the 2020–2021 coronavirus pandemic and the legislation enacted in response continue to weigh on the deficit (which was already large by historical standards before the pandemic),” CBO said. After 2021, deficits are projected to decline, CBO said, with the decrease faster and deeper than previously estimated. Deficits are expected to average $1.2 trillion from 2022 to 2031, or about 4.2% of GDP. Boosted by a stronger than expected economic recovery, with a 7.4% growth rate in calendar year 2021 and 3.1% in 2022, the cumulative deficit from 2022 to 2031 is now estimated to be $12.1 trillion, about 1% smaller than previously thought. Still, the deficits over the next decade are expected to run well above the 50-year average of 3.3% of GDP, and after falling for a few years, annual deficits are projected to start growing larger again starting in 2025. Debt to climb to record high: The publicly-owned portion of the national debt equaled the size of the economy at the end of the 2020 fiscal year and will exceed it by the end of 2021, standing at $23 trillion, or 103% of GDP, CBO said. The ratio will hover near the 100% level for several years after that before climbing again, reaching about 106% of GDP in 2031. Budget hawks say the CBO’s latest budget outlook confirms the need to get a handle on the nation’s fiscal trajectory. “Today’s report underlines the need for us to address our nation’s fiscal challenges,” Maya MacGuineas of the Committee for a Responsible Federal Budget said in a [statement](. “Despite the improvements in the outlook from the recovering economy, the national debt is set to hit a new record, exceeding even World War II levels. From there, we expect the debt to experience unfettered growth. This is not sustainable.” House Passes $760 Billion Infrastructure Bill The House on Thursday passed a roughly $760 billion, five-year transportation and water package that some Democrats say could be used to flesh out the framework of a bipartisan infrastructure bill, adding another layer of intrigue and potential complexity to the ongoing effort to develop a legislative package that can get through Congress. The 221-201 vote fell largely along party lines, with two Republicans — Christopher Smith of New Jersey and Brian Fitzpatrick of Pennsylvania — joining Democrats in favor of the bill. What’s in the bill: The measure, called the INVEST in America Act, authorizes $343 billion for roads, bridges and safety programs, including $4 billion for electric vehicle charging infrastructure; $109 billion for transit, which represents an increase of 140%, according to [The New York Times]( $95 billion for passenger and freight rail, including a tripling of Amtrak funding to $32 billion; $117 billion for drinking water infrastructure; and more than $51 billion for wastewater infrastructure. “Amendments adopted over two days of debate added at least $44 billion to the bill’s price tag, mostly to support the adoption of electric vehicles,” The Washington Post [reports](. In all, the package reportedly would represent a 50% increase over current spending levels and provide more funding to address climate change that the bipartisan Senate package that President Joe Biden has endorsed. What’s not in the bill: The legislation does not lay out how the new spending will be paid for, with those details to be laid out in separate legislation yet to be crafted by the House Ways and Means Committee. Why it matters: House Democratic leaders have pitched the bill as the basis for fleshing out the infrastructure package being developed in the Senate. “I’m suggesting that substantial amounts of the policy in our bill should be negotiated by the White House and the Senate and the House to be part of that bipartisan proposal,” Rep. Peter DeFazio, the lead sponsor of the bill and chair of the House Committee on Transportation and Infrastructure, said. He called his bill “the transformative policy that the Biden administration wants.” But so far there are more questions than answers about where the House legislation goes from here. “Just how the House Democratic vision of infrastructure will be melded with the deal struck by five Republicans and five Democrats in the Senate is anything but clear,” Jonathan Weisman of the Times reports. “The House bill and the Senate deal are not far apart in spending numbers on traditional infrastructure. Both efforts take up Mr. Biden’s call to replace all of the country’s lead drinking water pipes. But while the Senate framework only lays down broad categories of spending, the House bill extends surface transportation policies and user funds that are set to expire Oct. 1. It also established new policies like water bill assistance, buy American requirements and a pilot program for low-income transit access.” The return of earmarks: The package marks the first time the House has passed legislation containing earmarks since lawmakers reinstated them earlier this year, according to [Reuters](. The legislation includes nearly 1,500 earmarks totaling almost $5.7 billion — including more than 400 projects from Republicans valued at about $17 billion. Even so, nearly all Republicans opposed the package, which failed to muster the type of bipartisan backing such transportation measures usually get. Republicans instead slammed the spending in the package, its focus on transit and its climate measures, derisively labeling it the “Green New Deal and Inflation Transportation Act.” What’s next: After the bill passed, the House adjourned for its July 4 recess. The Senate is also away. Both chambers will have lots of work to do to get an infrastructure package passed before the current surface transportation law expires at the end of September. Another Cloud Over Infrastructure Deal: GOP Ire at IRS One of the key ways President Joe Biden and a bipartisan group of senators are proposing to pay for the $579 billion in new spending under their infrastructure plan is to have the Internal Revenue Service step up enforcement and collect more unpaid taxes. The plan calls for providing the IRS with an additional $40 billion in funding, which the negotiators project will lead to the collection of [$140 billion more]( in taxes, for a net gain of $100 billion. Not surprisingly, a number of Republicans have objected to beefing up IRS funding and enforcement or [expressed doubts]( about the bipartisan proposal. After all, Republican opposition to taxes runs strong and the party’s skepticism of the IRS has only been increased after the agency’s past targeting of political groups for additional scrutiny and its recent leak of confidential taxpayer data to ProPublica. “Throwing billions more taxpayer dollars at the IRS will only hurt Americans struggling to recover after waves of devastating lockdowns,” Sen. Ted Cruz (R-TX) said, according to Axios. “Instead of increasing funding for the IRS, we should abolish the damn place." Again, those kinds of comments aren’t surprising coming from Cruz, but a number of other GOP senators have expressed alarm about the proposed funding increase. Sen. John Barrasso (R-WY) told Axios that "spending $40 billion to super-size the IRS is very concerning," and "law-abiding Americans deserve better from their government than an army of bureaucrats snooping through their bank statements." Even Sen. Lindsey Graham (R-SC), a backer of the bipartisan deal, questioned the IRS funding proposal. He told Axios: “There's some people on our side who don't like empowering the IRS; I don't mind empowering the IRS if it's a reasonable thing to do. But I mean, how much uncollected taxes can you gather with $40 billion?" The key question in terms of the infrastructure agreement is whether GOP opposition to additional IRS funding could further undermine the [already dubious financing]( for the deal. After Spending Millions on Development, US Navy Pulls the Plug on Railgun The Navy has been working for more than a decade on a futuristic weapon that would fire projectiles at more than seven times the speed of sound, powered by electricity. The Navy seriously considered using the railgun on its high-tech, stealthy Zumwalt-class destroyers, but despite spending an estimated $500 million on research and development, the weapon was not ready for deployment in time. The destroyers themselves have proved to be something of a fiasco, with the Navy canceling most of its order for what was supposed to be 28 ships. Now, according to its latest budget request, the Navy is abandoning the railgun and shifting its focus to other types of advanced weapons, including hypersonic missiles and lasers. “The railgun is, for the moment, dead,” defense analyst Matthew Caris told the [Associated Press](. One problem with the railgun is its relatively limited effective range. Able to fire a projectile about 110 miles, it would have required putting its platform within range of enemy anti-ship missiles. There were also serious questions about the gun’s firing rate and longevity, with components needing replacement after just a few dozen firings. We'll be back in your inbox on Tuesday. Have a happy Fourth of July! Send your feedback to yrosenberg@thefiscaltimes.com. Follow us on Twitter: [@yuvalrosenberg]( [@mdrainey]( and [@TheFiscalTimes](. And please tell your friends they can [sign up here]( for their own copy of this newsletter. News - [House Democrats to Skip Budget Markup, Wait for Senate]( – Roll Call - [130 Nations Agree to Support U.S. Proposal for Global Minimum Tax on Corporations]( – CNBC - [Targeting the Wealthy and Corporations to Pay for Infrastructure Remains a Popular Option Among Voters]( – Morning Consult - [Plenty of GOP Earmarks in Spending Bill Its Members Will Oppose]( – Roll Call - [Democrats Search for Sweet Spot on ‘SALT’ Deduction]( – Roll Call - [Democrats Hope to Expand Housing Vouchers on Infrastructure Bill]( – Roll Call - [Biden's $400K Tax Hike Threshold Is Complicating His Spending Plans]( – Politico - [Trump Organization Is Charged in 15-Year Tax Scheme]( – New York Times Views and Analysis - [Republicans Shouldn’t Sign on to the Bipartisan Infrastructure Deal]( – Rich Lowry, Politico - [Mitch McConnell Has Laid a Trap for Democrats. Here’s How They Can Avoid it.]( – Greg Sargent, Washington Post - [The Federal Reserve Will Taper, But Don’t Freak Out]( – Bill Dudley, Bloomberg - [Supply-Side Economics Is What America Needs Right Now]( – Karl W. Smith, Bloomberg Copyright © 2020 The Fiscal Times, All rights reserved. You are receiving this newsletter because you subscribed at our website, [thefiscaltimes.com]( or through Facebook. The Fiscal Times, 399 Park Avenue, 14th Floor, New York, NY 10022, United States Want to change how you receive these emails? [Update your preferences]( or [unsubscribe](