5 questions for Alex Brill on US fiscal policy following the American Rescue Plan
By James Pethokoukis and Alex Brill
How much will the American Rescue Plan actually cost in the long run? How does the Biden administration plan to pay for upcoming spending packages? And what do Republicans want to do about tax policy going forward? Recently, I discussed these questions with Alex Brill.
Alex is a resident fellow at AEI, where he studies the impact of tax policy on the US economy, as well as the economic and political consequences of public policy. Previously, he served as the policy director and chief economist of the House Ways and Means Committee.
Right now, the estimated cost of the American Rescue Plan is about $1.9 trillion. Is that amount really what’s needed to fill the hole created by the pandemic?
The American Rescue Plan is many things besides a rescue plan, and those other things are quite costly in their own right. I think of the plan much like a train, where — as a result of the budget reconciliation process — policymakers first decided how big the bill would be (how many cars would be on the train). Then they came back with a separate set of legislation — the one just signed by President Biden — and loaded up that train to the tune of $1.9 trillion, adding whatever cargo they wanted pertaining to spending and tax policy. Some of those train cars are clearly related to the pandemic — including vaccine distribution and research — while others are associated with economic recovery, and others just seem to be multiple cabooses that have nothing to do with the underlying challenge at all.
So the size of the economic problem and the size of the response do not match up because the response is about so much more than just the recovery and pandemic itself.
So if the “rescue” part of the American Rescue Plan doesn’t quite accurately describe the plan, how about the $1.9 trillion part? Is this actually a $1.9 trillion plan?
My view is that it is not. By using the tools of the reconciliation process, lawmakers have been provided the opportunity to do things on a temporary basis that aren’t really intended to be temporary. For example, there’s a series of temporary tax policies included in the plan for the calendar year 2021 that are really just poorly targeted recovery tools not intended to be temporary at all.
The expansion of the Child Tax Credit is one of those policies. The Child Tax Credit, which is now $3,000 or $3,600 depending on the age of your children, is currently included as a temporary provision. But most people who support it — Democrats included — think it would make a good permanent policy. Accounting for things like this, I did some work recently that estimated the true overall cost of the bill to be $3.3 trillion.
Let’s say that there are some tax hikes in this next spending plan. Are we raising taxes to pay for stuff, or are we raising them for punitive reasons?
It’s hard to know the motivation of lawmakers, but I think there are three possible ways to answer here. One is this: If you want to buy something, you have to pay for it. And if the roads are in disrepair, we should solve that problem with a tax increase on those who are using the roads. Others might say, “No, the life of these roads and bridges is so long that we should borrow the money now and pay it back over the next 40 or 50 years, or some infinite period.” That’s a financing perspective.
But I think there’s also this punitive idea, which is a concern about how progressive the tax code is. Biden, for instance, is committed both to raising taxes and to his “no new taxes for anyone earning under $400,000” pledge. The administration says we should be cutting taxes for some households and raising taxes for others. That progressivity question is separate from the question of whether, on net, we should have higher taxes, higher spending, or more borrowing.
On the issue of taxation, what’s the case for a carbon tax?
To me, and to a lot of public finance economists, a carbon tax is a no-brainer: Carbon emissions are a negative externality, and we should match them with a tax to incorporate that social cost into the actual cost of carbon-intensive goods. It is a clear and simple way to address a market failure — which government is intended to do — and it generates a lot of money. Essentially, a carbon tax both mitigates some of our climate challenges and prevents us from needing other, more costly tax increases.
So it’s a great policy to support if you’re concerned about the climate, but it’s also a policy that could raise $1-2 trillion in revenue. With that revenue, you could cut the capital gains or corporate tax rate, finance the expansion of the Child Tax Credit, fix the roads and bridges, or do a little bit of everything. That’s an appealing variety of options.
So there’s a climate conversation to have about a carbon tax and the efficiency of using market mechanisms to combat climate change, as opposed to command-and-control strategies. And then there’s a non-climate conversation, which is essentially “Do you prefer to raise the corporate tax rate or impose a carbon tax?”
What do you think Republicans want to do about taxes going forward?
That’s a great question. When I first came to Washington in the ‘90s, Republicans held so many conferences to discuss how to rip the tax code out by its roots, debating the fair tax, flat tax, VAT Tax, USA Tax, and so on. That is gone, and now Republicans are just looking for income tax reform operating within the confines of the existing system. They want to have an income tax, and they want to broaden the base and change the distribution of it, or at least lower the statutory rates.
We saw this play out in the 2017 effort led by House Republicans to have a fundamental income tax reform. Unfortunately, they ended up with less than they set out for at the beginning — there was a lot of compromise. So there was progress, but it was incremental progress.
James Pethokoukis is the Dewitt Wallace Fellow at the American Enterprise Institute, where he writes and edits the AEIdeas blog and hosts a weekly podcast, “Political Economy with James Pethokoukis.” Alex Brill is a resident fellow at AEI, where he studies the impact of tax policy on the US economy, as well as the economic and political consequences of public policy.
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