In the context of the 2024 election year, what does President Biden's 2025 budget proposal signify regarding his strategies and priorities as he seeks reelection? And how could these proposals shape the overall landscape of this election cycle?
Garrett Watson, Senior Policy Analyst and Modeling Manager at the Tax Foundation, joins Kyle Hulehan to discuss the president’s plan—from raising the corporate tax rate to implementing a billionaires' tax—and the longstanding flaws in the budget process.
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In the context of the 2024 election year, what does President Biden's 2025 budget proposal signify regarding his strategies and priorities as he seeks reelection? And how could these proposals shape the overall landscape of this election cycle?
Garrett Watson, Senior Policy Analyst and Modeling Manager at the Tax Foundation, joins Kyle Hulehan to discuss the president’s plan—from raising the corporate tax rate to implementing a billionaires' tax—and the longstanding flaws in the budget process.
Links:
Follow us!
https://twitter.com/TaxFoundation
https://twitter.com/deductionpod
Support the show
In the context of the 20, 24 election year, what does president Biden's new budget proposal signify regarding his strategies and priorities as he seeks reelection? And how could these proposals shape the overall landscape of this election cycle? Hello and welcome to the Deduction, a Tax Foundation podcast. I'm your host, Kyle Houlihan, and today we are joined by Garrett Watson, senior policy analyst and modeling manager here at TF. Garrett, how are you doing today?
Garrett Watson:Doing well, how are you doing?
Kyle Hulehan:I'm good. And I mean, you've been on with me before and you know, normally I like to dilly dally and ask a personal question, but today we have a big show. We have to break down the budget shenanigans. We have to really get in here and we have to dive in and see what's going on with the Biden budget and the projections and analysis. and if you could just start me off here, what are the, key components of Biden's proposed budget, the tax changes for fiscal year 25 and how did they aim to address, the administration's policy goals?
Garrett Watson:We're here again, talking about the Biden budget. And of course, every year the president comes out with, his, what is his vision for tax and spending for the federal government every year? that's first part of the process to kick off the congressional budgeting process that's been, tumultuous and full of shenanigans every year, and this year there's a lot of continuity with what we've seen from the president and the white house over the last three years, really taking aim at raising taxes on higher earners and corporations through a variety of different both conventional and fairly novel tax hikes. And that revenue from the increased tax hikes, it's going to be used to, fund both additional spending, a wide variety of new programs going to pay family leave, increase support for childcare, trying to reduce health care costs. amongst other spending changes as, as well as trying to reduce the deficit. And one major headline coming out of the Biden budget that the White House has been, has been talking about is reducing the deficit by 3 trillion over 10 years. Sounds like a lot of money, though. It's only a fraction of the total debt that we're currently dealing with. And so there's generally continuity of what we've seen in the past. And what's really important this year, of course, is it's also an election year. So in November, this budget really does represent the vision that the president will likely want to continue in a second term, should he win reelection. And it's continuing that theme of raising taxes on higher earners, on corporations, ensuring that folks under 400, 000 are not seeing their taxes hiked, at least in his view. and trying to, use that revenue for both spending programs and reducing the deficit.
Kyle Hulehan:Yeah. And so, How could these proposed tax increases on businesses and high earners potentially impact the overall economy and U. S. competition on a global scale?
Garrett Watson:So we took a close look at this in our modeling to look at all the numbers, to look at both the economic impact and the revenue raised, and in a piece that we published on our website at taxfoundation. org, we found that. Overall, we're looking at about 4.8 trillion dollars in tax hikes over the next 10 years. And that's a pretty large number, even compared to previous versions of the Biden budget and Biden tax proposals. During the 2020 campaign, for example, he proposed raising taxes by about 3 trillion over 10 years, and now we're getting closer to 5 trillion here. And what we found was combined, when you take the effect of all those tax changes, It would reduce the long term size of, of our economy by about 2%. And while that may, may sound like a small number, it actually represents hundreds of billions of dollars of lost output every year, through these tax hikes that reduce incentives to both work and invest. and of course this comes at a time when, while we are seeing a fairly tight and strong economy, could erode American competitiveness over the long run. Another way to think about this is. We took a look as well in our piece at top tax rates, both income taxes, corporate taxes, and compared them to other countries across the developed world. And what we'd find is when you add all these tax hikes up, we would generally be in an uncompetitive position at or near the top of developed countries for combined tax rates. That's of course going to erode U. S. competitiveness at a time when we're really trying to, increase competitiveness against great powers like China. And, that's another challenge with this budget. The last thing I'll say of course, is this four and a half to five trillion dollars in tax hikes is really, for the Biden administration, in some ways, is only the beginning. And that's because they do specify in the, budget that they want to cover the cost of making permanent the 2017 tax law, that expires, much of the individual provisions expire at the end of 2025. That's gonna cost over one and a half trillion dollars to make permanent for those who earn less than 400, 000 a year, which is the Biden proposal. And they say that, hey, they would cover that, but they cover it through other unspecified tax hikes. So we're looking at tax hikes even beyond what's specified in this budget. And that's concerning when we think about long run American competitiveness. I
Kyle Hulehan:I mean, when you talk about these numbers, 4. 8 trillion, a hard number for you to even grasp. That is so many zeros. These are huge numbers, and 2 percent sounds small in comparison, These are things that, will affect, the average American's life. And I, and I think, you know, it's just really crucial to point that out, even though 2 percent doesn't sound like a lot, it has a lot of magnitude in our lives and in a day to day way, we will be affected. and I, I want to point this out cause you're talking about the deficit reduction efforts that are, in the budget. I just want to know how credible these are. Are considering what you're saying about TCJA. It seems like maybe there's a little bit of a funny math or just, you know, not including all the details. This I think happens maybe in all of the budgets and also political sides. Everybody's a little funny with the math. But could you kind of break that down for us?
Garrett Watson:I think you're spot on that there has been, an increased tendency in the budgeting process to use math shenanigans to forward certain policy or political goals. We see this in Congress all the time, of course, and we do see it In the president's budgets across administrations. And I, I think just as one example on the current budget, as I just mentioned, there isn't, any attempt to, build into the budget the cost of making permanent, the expiring 2017 tax law individual tax cuts, which does represent a pretty large, impact on individuals, tax situation starting in 2026 for a lot of working class and middle class families in particular. And that's gonna cost one and a half trillion over 10 years. Another big number. But that number isn't, isn't represented anywhere, anywhere in the budget. So we have, you know, qualitatively in writing. The administration saying that they intend to make these tax cuts permanent, but not actually grappling with the tradeoffs, the math tradeoff within the budget numbers itself, which in some ways defeats the whole purpose of a budgeting process, right? Where you're trying to grapple with the total numbers as we do on our household budgets every, every month or every year. And so that's just one example. Another example is the administration, of course, is interested in bringing back and expand a child tax credit that existed in 2021 under the American rescue plan that made the credit more generous, made it more available to. Lower income families, that's also very expensive. It costs upwards of a trillion dollars to make permanent. They extend it for 2024 and 2025. They bring it back for those two years, but it's only temporary, but their, their intention is to make it permanent, but they don't grapple with the cost of that permanency in the budget either. So those are just two examples where, this 3 trillion deficit number is a bit misleading because it's not including the cost of these other tax changes that we know the administration, values, prioritizes, and wishes to make happen. and that's something we also see, of course, in Congress, where, in the budgeting process, they may take advantage of temporary, tax or spending changes or other budget gimmicks in an effort to make the math work, but that doesn't represent the actual fiscal costs of their choices. to the American people. And so, yeah, there's something to be learned here on that broader budgeting process, that is fundamentally broken in a lot of ways. And the fact that we continue to see continuing resolutions, and, partisan fights across the board when it comes to the budget is yet another symptom that that process needs to be improved over the long term.
Kyle Hulehan:And I think I can point this out right away. I like to try and take listeners, back to, to some of the principles that we have at the tax foundation. This is not very transparent. And this is an issue, you know, we see across the board, We're talking about president Biden here, but we don't even get many plans from, former president Trump. So it, there's just not a lot of transparency across the board going on with these, budgets in the way that this is working, and that's a principle that we have here and having a transparent tax policy and a transparent budget is very important.
Garrett Watson:Exactly. Yeah, it's very hard to parse through, the, the budget, just going through the documentation is, and of course it is very complicated. It's a massive federal government that's being funded here. but it's, it is quite opaque even to budget and tax experts to say nothing of the average person who just wants to understand what the priorities are for the government and how it's going to impact them. And, that's important both in the budgeting process and how that information is presented and in the proposals moving forward. As you just mentioned, Right? this is very much a bipartisan problem where, for example, Republicans have, emphasized they want to make permanent the entirety of the 2017 tax law, but they have not outlined or, maybe they, they, they think they don't have to outline any, way to offset that three plus trillion dollar cost over the next 10 years. And we know there probably will have to be offsets to make that sustainable given the debt situation we're in. And so being transparent about those tradeoffs is really, it's a hard political and policy problem. It shows up on the spending side, of course, when we talk about spending cuts, but then conveniently there's never any discussion about what is actually being cut transparently and how that will impact folks. but ultimately all that means is we're just delaying those hard tradeoffs into the future and those tradeoffs are going to hit even harder. the worse our fiscal situation becomes. That's especially true, of course, of entitlements. And so, you know, a transparent budget process is going to help with these bigger picture, harder problems, structural problems within the U. S. fiscal trajectory. And of course, it's just, it's a way to effectively steward the money that taxpayers are supporting every year. And, and that's something that can be done on a bipartisan basis. And the other thing you just mentioned, of course, is it's also really important for presidential candidates in particular to be transparent about their tax plans. And so, you know, the administration, as much as, you know, we may disagree with certain ideas on the basis of our tax principles, they are generally pretty clear and detailed on what their direction looks like. Unlike, know, the former president where we have not seen a lot of detail outside of certain, particularly bad ideas related to tariffs. We would love to see more detail there on what their plans are for 2025. It's a massive year for taxes. so folks have an understanding of what their vision is moving forward and the trade offs they are going to agree to. If they, end up winning that election.
Kyle Hulehan:As a transition here. We're talking about, how to raise taxes or how to raise revenue one potential way that That Biden is suggesting that, in his budget is with a billionaire minimum tax. And what is the approach there? And how do you think that would affect the nation's economic landscape?
Garrett Watson:So a major theme that we've seen from president Biden's administration has been focusing on, basically a form of income that higher earners tend to get, known as capital gains income or investment income, where the standard tax treatment true of, of our country historically and across the developed world is we typically don't tax capital gains or paper gains until they're actually sold and realized. So if you have a stock that you've invested in for a couple of years and it's gone up in value by 30%, you're not going to be taxed on the value of that stock going up until you actually sell it. And there's a lot of reasons why that's the case. Of course, as it relates to knowing the, the exact value that you're taxing the asset at, the fact that there's been liquidity when you sell it to pay the tax, right? but the concern is a lot of, high earners get much of their income from, these gains and they're not taxed, they may be taxed in the far future, when they actually sell the asset, say 10 or 20 years from now, or if they leverage what's called a step up in basis, which is basically say you pass away and you give a stock to your, Family or your heirs, that increase in value may not be taxed at all through that step up in basis change. And so the administration is thinking about how are there ways in which we can try to collect tax on these unrealized gains from higher earners and this billionaire minimum tax is a very complicated design to try to get there. So the idea is if you have wealth over a hundred million dollars, we're going to include the value of all those unrealized gains, the stock that you hold, the private businesses that you may own, the artwork that you may have, and include those paper gains that you haven't actually realized or sold off to get the money in cash into your tax situation. And if your effective tax rate, meaning the amount of tax that you pay, divided by the total value of all of your unrealized gains plus your actual realized income, if it's less than 25%, we're going to. Talk you up so that you pay tax enough tax to get you to 25%. see, it's already complicated just in the description. It gets even more complicated from there because you have to develop a complex system of valuation rules and deferral charges and anti avoidance mechanisms to ensure that folks are paying proper tax on assets that are either illiquid, right? They may be locked up in private business, for example. It's hard to get the money to pay the tax, or hard to value, right? If you, artwork or privately held business is another great, another great example where it hasn't been valued properly. To get around all those problems related to taxing unrealized gains, you create this fairly, complicated and untested system to try to raise taxes on higher earners. And so that's, that's really what's going on there. the administration claims they may raise about 500 billion dollars over 10 years from this tax, though it's highly uncertain how those higher earners will respond to this tax system because it's so untested. And of course compared to say raising tax rates or taxing Income in a different way that is realized it is going to be a pretty complicated affair and based on what we've seen from the administration of certain complicated new taxes in the past, it may take a lot of time for it to actually, be fully rolled out before it's ready to go. as we've seen with stuff like the, um, minimum book tax that was passed last year on businesses. So, I expect, that proposal to not necessarily a lot of traction politically right now, but. It's something to keep a close eye on because it does seem to be a centerpiece what the president is proposing. and does have some passionate advocates amongst the, policy community who supports those ideas and, amongst certain folks in Congress.
Kyle Hulehan:Now, I would say I think the word of the day here for us is shenanigans, and I think that this may apply to this mainly because it's incredibly confusing and hard to understand how they would make all of that happen. I think, again, here at the Tax Foundation, we try for simple, we strive for that. I think a lot of people on all sides would like to see a simpler tax code. I think the average American would like to see that as well. And when you're talking about that, it seems like there'd be no clear way to do it. You'd have to have, IRS really on, top of people in a, completely different way. and that, that to me just screams of something that's, not very feasible.
Garrett Watson:I think that's the right way to think about it. It would require the IRS to be intimately involved with, the wealth accrued by, these, very high earners, right? To understand, are they avoiding this tax, right? Are they properly valuing these assets? That's going to require not just the IRS involvement, but also the involvement of, tax courts and many lawyers. Because, of course, these taxpayers are going to be very adept and willing to find ways to minimize the amount of tax paid here. And, when you look at that compared to the alternatives, broad based, simple, transparent ways to raise revenue, to us it seems like the latter approach makes more sense. And of course the other point is if you do value progressivity and folks have different views on what is a fair share of the top to pay, because that is a fairly, that's a more philosophical point than anything, there are ways to make transparent, broad based taxes progressive. So that's the point we've been emphasizing is even if you, have the sort of philosophical goals that the administration may hold or others may hold, there's another way to approach this, right? And we thought about, not just incremental ways to get there, but also just broader overhauls in the tax system to, for example, tax consumption progressively. consumption, unlike this idea, right, is a much more transparent, method of, of taxation, much harder to avoid than, than trying to tax, paper and unrealized, wealth. But, the one thing that we've seen in, in these proposals is, they're trying to find, more and more clever ways to both, tax higher earners, and try to reduce avoidance. And so in some ways that is, attractive to folks who are in the tax wonk world. I think that's part of what's going on is, you can create what can be an elegant system that could work, in theory, but then doesn't work very well in practice. And I think that's the part that, it's not even an ideological point or a partisan point, right? That can apply across the board. We've seen this, a variance of that, right? One example of that, I think we've been very clear, relates to, some, some versions of the flat tax, which we've talked about, before, where, looks interesting in theory, but then when you look at the practice, it can be very hard to implement. So that's another thing that we need to be careful about as tax wonks. is making sure we understand the real world implications for taxpayers. How does this actually impact people? How would this work in the real world? And that's where our principles, I think, of transparency, simplicity, really shine, is they actually work in the real world. It's not just in the realm of tax theory.
Kyle Hulehan:And to absolutely no one's surprise I think, this is an election year. And so we have elections on the horizon. So what do you think, as we're talking through these ideas, what are the prospects for the enactment of these tax proposals? And where is the budget and tax debate going in this election year?
Garrett Watson:So I think much like in our broader, sort of, political world, there's been, an increased divergence in the vision of tax policy across the world. you know, both parties, we're seeing this, increasingly with, yeah, yeah, the, and the president's budget, we're often asked, like, what, what are the elements that are maybe bipartisan or where there might be agreement? And there are some items, some narrow items on, for example, housing tax credits that maybe we don't agree with fully, but do have some bipartisan interest. But increasingly, the answer to that is there's not much there, right? That there's just such a dramatic divergence in this approach for taxing high earners, really raising top tax rates massively, trying to bring in as much revenue as possible from a very small subset of taxpayers, versus the idea of, well, maybe we can just continue deficit finance tax cuts and we don't have to, deal with the trade offs and both of those visions. you know, they of course have their supporters, but there are very real weaknesses in both. as we talked about. And so I think the, there is definitely an opportunity for new ideas. I think in some ways the debate has, stayed somewhat frozen since 2017 to 2020, where we saw the TCJA get passed and, the president come in with his ideas on raising taxes. But the problem is we're really going to hit a cliff here, a figurative and a literal cliff when it comes to the TCJ expirations next year, and that's really going to mean there's going to be real world impacts. A lot of this has been, you know, in the realm of politics or, or, or tax theory, but this really is going to be a real world tax hike on folks at the end of 2025. So that means both parties have to start. Likely working together if there's some sort of, mixed result in the election this year, and figuring out what those priorities are. Do we really prioritize a simple tax code? Do we prioritize a tax code that doesn't stand in the way of growth? or are we going to, are we going to prioritize a tax code that can raise sufficient revenue in the form of offsets to cover other tax changes? I think those are the important questions that, the candidates and both parties really need to grapple with, and we haven't seen that so far, unfortunately. And so, there is this temptation, we've seen this trend again and again, where Congress waits until the last minute to deal with problems, and that may be the case. With, with, the expirations of 25, unfortunately, but, this election will be, uh, one of the last major milestones before we get to that discussion. At the beginning of next year.
Kyle Hulehan:And I think when you're talking about this, there is this, you know, when you're talking about pay fors and trade offs, there are ways to do things, like even when you're talking about, you know, when we were talking about the billionaire minimum tax, there are ways to do things differently, you know, there's ways to increase progressivity, there's a lot of different ways to do this, but they can A lot of times, like you're saying, they can be done in a simpler, more transparent, broader way. And that tends to be better for the economy. And it's, I think we're in a, we're in a tough position here and election years are tough, but I'm really thankful for you to be on the show today and to break all of this down for us here. And I just want to ask, is there anything that you want to plug today for the listeners to let them know something to look out for?
Garrett Watson:So we have been going in, in depth on the Biden budget, including all the many tax proposals. And there's a lot to cover on our website at taxfoundation. org. So recommend you check that out. and we're going to continue to break down, the, uh, president's tax ideas, as well as, what TCJA, permanence may look like. In terms of either full extension or other options, for, reform in that discussion, that may be done in a pro growth yet revenue neutral way. So we'll have more ideas on that coming soon in the coming months. So we're looking forward to it.
Kyle Hulehan:Garrett, thank you for being on the show today.
Garrett Watson:Thanks so much.