Two faculty experts weigh in on the pros and cons of the new president’s first spending plan.
Susan Hudson, The Well, Thursday, May 27th, 2021
The more detailed version of President Joseph Biden’s first budget should arrive in Congress today, but he released an outline of his proposed spending plan early last month. A sharp departure from his predecessor’s first budget, Biden’s $1.5 trillion budget outline and a $1.7 trillion jobs and infrastructure plan call for increased government spending on infrastructure, mass transit and education, extend “green” tax credits and increase taxes on the wealthy and corporations.
The Well asked two faculty experts to share their thoughts about pros and cons of Biden’s budget.
Maryann P. Feldman is the Heninger Distinguished Professor in the public policy department in the College of Arts & Sciences, an adjunct professor of finance at Kenan-Flagler Business School and a research director at the Kenan Institute of Private Enterprise. She focuses on innovation, the commercialization of academic research and the factors that promote technological change and economic growth.
Jeffrey Hoopes is a research director at the UNC Tax Center and an associate professor of accounting at Kenan-Flagler Business School. He examines issues at the intersection of accounting, public economics and finance. At the fourth annual UNC Tax Center and Tax Policy Center Conference on June 9, Hoopes will be one of the panelists who will discuss the effects of the Biden administration’s corporate tax proposals. He blogs about current issues in tax at Write-Off: The Tax Blog.
Biden’s proposal: Raise the corporate tax rate from 21% to 28%.
Feldman: Biden is proposing increasing (the corporate tax rate) to 28%. But that is significantly lower than the effective corporate tax rate of 35% that we had between 1994 and 2017. The idea behind the lower tax rates for corporations is that the corporations will invest and create more jobs, and this will spur the economy forward. And, really, there’s no evidence of this. It has never worked. It’s just a remarkably bad idea that is enduring. You know, Paul Krugman calls this a zombie idea. It just refuses to die.
Hoopes: There is no easy answer to how to get more tax revenue — everything involves tradeoffs. When politicians say they want more tax revenue, they often make it feel as you can simply go out and raise taxes on corporations, costlessly. But that is never the case — there are always tradeoffs. If there were easy solutions, we would have tried them already.
For example, when the U.S. had the highest corporate tax rate in the world, we had a handful of firms that had simply had enough of the U.S. tax system that inverted, that is, abandoned the U.S. in favor of a country with a more competitive tax system. Since Congress dropped the rate to 21%, there have literally been zero inversions. Things have clearly changed. This is aside from the abundance of academic evidence that taxes affect investment, GDP, innovation and other outcomes.
Part of why politicians would suggest collecting taxes from corporations is because it gives the sense that it will only hurt big companies. However, even the most conservative estimates suggest that employees of companies bear about 20% of the corporate tax. If you raise corporate taxes by $2 trillion, that’s still a $400 billion dollar tax increase for employees.
Biden’s proposal: Spend $1.7 trillion on jobs and infrastructure, including repairing deficient roads and bridges; strengthening research and development and supply chains; and expanding broadband access.
Feldman: Economists have a fear of debt and deficit spending. But spending on infrastructure is debt that we incur to make big investments in our future productive capacity. My favorite definition of infrastructure is “everything that we take for granted and only notice when it breaks down or doesn’t work.” Infrastructure is the stuff that is provided by government because it’s just simply beyond the capacity of any private firm or individual to address. Right now we are in a digital economy, and broadband is fundamental for individuals to be able to participate in the economy. The infrastructure in a digital economy is cable. It’s satellites. It’s silicon chips and code.
If you extend the idea that infrastructure allows people to be productive, we see that women have been very adversely affected by the closing of childcare and schools and also care for the elderly. They have withdrawn their labor force participation. In World War II, the government set up daycare centers that allowed women to take jobs in factories — Rosie the Riveter. That’s a very romantic image, but it’s only enabled by a child-care infrastructure.
Hoopes: The last time I looked at this, one of the largest one-line items was increasing spending for in-home care of elderly people — many hundreds of billions of dollars. I don’t know of many people who, before President Biden tried to expand the definition of “infrastructure” to include literally anything the government could spend money on, would have included in-home care as infrastructure. Infrastructure is roads, bridges, cable, sewers, etc. — physical structures. It seems like a clever sleight of hand to call much of what the bill includes infrastructure. We’ve spent so long telling ourselves that our roads and bridges are all broken and we have to fix them that now President Biden wants to call everything a road or a bridge, even now, I guess, the elderly.
Biden’s proposal: Increase the budget of the Internal Revenue Service by $80 billion over the next decade.
Hoopes: Over the last decade, the IRS has seen budget cuts, and that’s a problem as we’ve been cutting their budget while simultaneously giving the IRS more to do. And there is some evidence that we could certainly see more tax revenue without increasing the tax rate and without broadening the tax base if we just funded the IRS a little bit more. There are huge differences in estimates in how much revenue there is actually out there that could be collected, so we should not fool ourselves that there are trillions of dollars out there to be collected. But certainly we could bring in more if we gave back the funding that has been cut from the IRS, and we should do it.
Feldman: The idea is more enforcement of the rules and making sure that people are paying their taxes. Our tax code is so complicated, and I think that’s something that does need to be addressed, but it’s going to be more difficult. There needs to be more enforcement and greater scrutiny.
Biden’s proposal: Extend tax credits for wind, solar and other renewable energy projects for another 10 years.
Feldman: We subsidize highways, and we subsidize different industries to get them started. And green technology is still an infant industry, but it will provide us with fuel efficiency in the future and also create these new technologies.
Hoopes: Why does the federal government need to play a role in creating more green businesses and solving climate change? The argument is that there is some kind of market failure. The argument goes that if a company pollutes, increased particulate matter will make people sicker, it exacerbates global warming, etc., so the government could step in and do something. Then the question becomes do they punish pollution or reward actions that Congress decides help the situation? These are not easy questions. Certainly we have a lot of evidence that when the government has tried to step in and fix problems, they don’t always get better, especially when there are proposed hundreds of billions of dollars being doled out that will likely be sought after by those eager to claim what they do will save the environment.