Dems' Spending Bill Will Add to Deficit, CBO Says

Plus, the incredible shrinking estate tax ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ [The Fisc](   By Yuval Rosenberg and Michael Rainey 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. News - [Dems Race to Pass Social Spending Plan With $1.7T Cost Estimate in Hand]( – Politico - [Budget Office Determines Democrats’ Spending Bill Will Nudge Deficit Higher]( – New York Times - [Tax Deduction That Benefits the Rich Divides Democrats Ahead of Vote]( – New York Times - [Dems Agonize Over Tax Cuts for Rich: ‘Bad Policy, Bad Politics’]( – Politico - [Democrats Face Moment of Truth: Will They Give Millionaires a Tax Cut?]( – HuffPost - [Schumer, McConnell Turn Down the Heat on Debt Limit Fight]( – Politico - [Delauro Pushing for Short Stopgap Funding Bill, No ‘Anomalies’]( – Roll Call - [SALT Analysis Finds Little Middle-Class Help in Congress’s Plans]( – Bloomberg - [Democrats Urge Biden to Do More About Inflation]( – Axios - [Biden Can’t Avoid Blame for Inflation, a Tough Problem to Fix]( – Bloomberg Businessweek - [Biden’s War on Inflation Is a Battle to Change Human Behavior]( – Politico - [How Child Care Became the Most Broken Business in America]( – Bloomberg Businessweek - [As G.O.P. Fights Mask and Vaccine Mandates, Florida Takes the Lead]( – New York Times Views and Analysis - [IRS Reform Will Generate a Lot More Revenue Than the CBO Thinks]( – Lawrence H. Summers, Washington Post - [How Democrats Got Trapped in a SALT Box]( – Jonathan Bernstein, Bloomberg - [Americans Aren’t Feeling Relief From Bid]( Big Washington Victory]( – Stephen Collinson, CNN - [Inflation Is Making the SALT Deduction Less Sweet]( – Alexis Leondis, Bloomberg - [Want More Affordable Housing and Health Care? Here’s a Fix]( – Samuel Hammond, Daniel Takash and Steven Teles, New York Times - [The Pandemic Prompted People to Retire Early. Will They Return to Work?]( – Peter Coy, New York Times - [The U.S. Supply-Chain Crisis Is Already Easing]( – Brooke Sutherland, Bloomberg - [I Remember 1970s Inflation. Politicians Should, Too]( – James Ellis, Bloomberg Businessweek - [Biden’s Plan to Vaccinate the World Faces an Obstacle: Vaccine Manufacturers]( – Adam Taylor, Washington Post Copyright © 2020 The Fiscal Times, All rights reserved. You are receiving this newsletter because you subscribed at our website 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](