US fiscal policy following the American Rescue Plan: My long-read Q&A with Alex Brill

By James Pethokoukis and Alex Brill

How necessary is the $1.9 trillion American Rescue Plan at this point in our economic recovery? How concerned should lawmakers be about paying for this and future spending plans? And how suitable is a carbon tax for combating climate change and raising revenue? Recently, I discussed these questions and more 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.

What follows is a lightly edited transcript of our conversation, including portions that were cut from the original podcast. You can download the episode here, and don’t forget to subscribe to my podcast on Apple Podcasts or Stitcher, or download the podcast on Ricochet. Tell your friends, leave a review.

Before we passed the American Rescue Plan, how successful had America’s response to the COVID recession been?

Well, it’s a question that, of course, we’ll never truly know the answer to because we’ll never know what could have happened if we did things differently or “better.” But I would say that a year ago, when the pandemic started and things began to shut down (quite literally) across the economy, we fell into an enormously deep hole and recession. Now, we have climbed out of that hole and are well into a recovery — we’re now in a much better place than we were just a few quarters ago.

And at the same time, we’re not there yet. Millions of people remain out of work and many businesses are only partially operating or shut down entirely. I would say that, last year, the fiscal response at the federal level was surprisingly well-timed and large, which has yielded many benefits. I can’t say if it was perfect or not, but I would say that it put us back on a path — along with the public health response, of course — for the strong economic recovery that’s underway at the moment.

It seems like there was a lot of chatter a while ago that the US was potentially a failed state. I think that’s a silly question — if you look at our economic response, it doesn’t seem like that of a failed state.

Yeah, that seems preposterous to me. Two things really come to mind when you say that. First of all, with respect to the depth of the recession, remember that our policymakers intentionally tried to shut off the economy in an attempt to save it. That’s not a crazy response to a public health crisis or pandemic. In a sense, we needed to suspend the economy temporarily. After that, we needed to recognize the costs that the shutdown was imposing on our citizens and businesses and get the economy going again — we needed to restart the engine.

People enjoy the weather in Central Park, the day before the city starts phase two of reopening after the lockdown due to the coronavirus disease (COVID-19), in the Manhattan borough of New York City, U.S., June 21, 2020. REUTERS/Jeenah Moon
People enjoy the weather in Central Park, the day before the city starts phase two of reopening after the lockdown due to the coronavirus disease (COVID-19), in the Manhattan borough of New York City, U.S., June 21, 2020. REUTERS/Jeenah Moon

I am also reminded that when this started, we thought it would be for perhaps a month and a half, not what will probably turn out to be a year and a half. We didn’t go into this crisis with perfect foresight of exactly what it was going to be or how it was going to unfold. But in many respects, we successfully shut down the economy, and I certainly think we are doing well to restart it. And I don’t mean to suggest that it is “mission accomplished” or that everything is fine and hunky-dory, but we are on our way to, and even in the midst of, a strong recovery.

If we’re not quite yet at “mission accomplished,” are we $1.9 trillion away from “mission accomplished”? That’s the cost being bounced around for the American Rescue Plan right now. So, are we $1.9 trillion away from being back to normal?

The American Rescue Plan is many things besides a rescue plan, and those other things — those associated policies and provisions — are quite costly in their own right. I’m reminded a little bit of the Green New Deal, which would have been very costly as a proposal. Only a portion of it was “Green,” and most of it was “New Deal.”

I think of the American Rescue Plan much like a train, specifically regarding the budget reconciliation process. Since you only needed 51 votes in the Senate, reconciliation rules are a train in the sense that, first, policymakers decided how big the bill would be — that’s how many cars would be on the train, perhaps. Then they came back with a separate set of legislation — the one that was just signed by President Biden — and loaded up that train to the tune of $1.9 trillion. And the way the budget reconciliation process works is that once they decide the length of the train, they can load up any cargo they want with any combination of spending and tax policies. Some of those train cars are clearly related to the pandemic at hand, whether related to vaccine distribution and research or other timely and relevant matters, while other issues are helping with economic recovery.

We can debate if they’re perfect policies or not, especially those related to unemployment. We have a lot of unemployment at the moment, so whether that was the right unemployment policy response is a big question. But some of the other policies just seem to be multiple cabooses on the train — one after another that have nothing to do with the underlying challenge at all. So thinking about the size of the economic problem and relating that to the size of the response, it does 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. My view is that, by using the tools of the reconciliation process, lawmakers have been provided the opportunity to do things on a temporary basis that aren’t intended as temporary at all. What I’m talking about here is a series of tax policies that are included in the American Rescue Plan for the calendar year 2021 — temporary tax provisions. You say, “Oh, a temporary provision to solve a temporary problem. That makes sense.” But a large share of these policies are poorly targeted recovery tools that are not intended to be temporary at all.

First and foremost, the expansion of the Child Tax Credit is one of those policies. The Child Tax Credit seems to be ever-expanding. Some people like that. I don’t. It was once $500, then it was $2,000, now it is $3,000 or $3,600 depending on the age of your children. That is a temporary provision, but if you think that’s a good idea, why on Earth would you think it’d be a good idea only for one year? No one would. And the Democrats don’t think that — they think this is good permanent policy.

I did some work recently that estimated the true overall cost of the bill. If we think about some of the temporary provisions in the bill as being permanent, then the ballpark estimated cost came to be $3.3 trillion. That’s just thinking about the expected permanent cost of those tax provisions.

I think the response to that from some quarters, particularly on the left, would be, “Okay. A bigger number is fine. Interest rates and inflation are pretty low. We may not know exactly how much fiscal space there is — how much runway we have until it’s a problem — but we seem to be nowhere close to an issue. So, $1.9 versus $3.3 trillion, no big deal.” What’s the case that could be a big deal?

Those same voices were also the ones in 2017 asking how on earth Republicans could pass what they call a “tax reform” around the cost of $1.7 trillion. They said “We can’t afford this. This isn’t tax reform. This is unsustainable tax relief that’s not appropriate or necessary.” So, it’s amazing how the same people can have different views in different situations of the same problem.

One can surely say, “Hey man, it’s a $20 trillion economy and this is good stuff. So, let’s just do it.” And they can point across the aisle at the other party, who’s also contributed to increases in the deficit, and look to make a deal. But is that bipartisanship — that willingness amongst many lawmakers to approach a variety of political challenges with a deal that increases the long-term fiscal challenges facing our country — a problem?

I think it is a problem. I don’t know when it will be a true crisis, and I don’t think other economists know that answer with any precision either. But there’s no free lunch here, no free money. Sure, there are low interest rates at the moment. That’s certainly the case. But the more that we borrow — understanding that there is always an expectation that interest rates will be higher in the future — the more we are passing that burden of today’s borrowing onto tomorrow’s taxpayers.

U.S. Federal Reserve Chairman Jerome Powell speaks to reporters after the Federal Reserve cut interest rates in an emergency move designed to shield the world’s largest economy from the impact of the coronavirus, during a news conference in Washington, U.S., March 3, 2020. REUTERS/Kevin Lamarque
U.S. Federal Reserve Chairman Jerome Powell speaks to reporters after the Federal Reserve cut interest rates in an emergency move designed to shield the world’s largest economy from the impact of the coronavirus, during a news conference in Washington, U.S., March 3, 2020. REUTERS/Kevin Lamarque

We have another $2 trillion to $4 trillion infrastructure bill coming up. Are we going to pay for that?

Well, that’s going to be the big debate. In large part, President Biden campaigned on a series of tax increases that will be part of his budget. But it is difficult to do what I call “naked tax increases” — which means that the Democrats alone pass a tax increase — because people like to see some return on that.

I think there’s a view that this is a “two birds with one stone” opportunity to spend more money, which is a desirable thing whether it’s spending money on an infrastructure bill or something marketed partly as a climate bill.

It’s also an opportunity to achieve a second goal: changing the progressivity of the tax code and raising taxes on high-income earners. That’s what lawmakers sometimes refer to as a “twofer.” It’s not seen as “the cost of one for the benefit of the other.” Rather, in this context I think that many in the majority see this as a twofer — two wins at the same time.

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 ideological (or punitive) reasons? Why are we doing that, especially if it’s going to be politically difficult — even among Democrats — to do?

You’re asking me a hard question about the motivation of lawmakers versus the sometimes-easier question of the consequences of their actions. What’s the motivation behind their desires? It’s hard to know.

For some lawmakers, it seems like there is certainly a punitive aspect to it. They believe that the rich or companies have gotten away with things, and so they’re looking to punish them — it’s a fairness issue. The revenue raise is almost secondary.

Right. I think there are three possible answers here. One is this: If you want to buy something, you have to pay for it. That’s a basic financial principle that guides us when we go to get a cup of coffee and recognize that the roads and bridges are in disrepair, and we want to solve or finance that problem with a tax increase on those who are using the roads and bridges. That seems reasonable.

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 are other perspectives here as well. One is this punitive idea — I think that’s in play. Another is just a different view about what the appropriate progressivity of the tax code is. I think that’s important because Democrats sometimes get painted as the party that just wants to raise taxes. That’s a bit of an oversimplification because they don’t want to raise taxes on everybody. I mean, fundamental to the president’s campaign was a limited “no new taxes” pledge. Now, whether he can stick to it or not is debatable, but he ran on “no new taxes for anyone earning under $400,000.”

So Biden is both committed to raising taxes and committed to this partial “no new taxes” pledge. That’s about the progressivity of this system and this fairness issue — that we should both be cutting taxes for some households and raising taxes for others. That’s separate from the question of whether, on net, we should have higher taxes, higher spending, or more borrowing. Obviously, they interact.

But if you want a transformation of the safety net or the welfare state, doesn’t that have to be something everybody pays for? Maybe that’s through an existing system or a value-added tax, but if that’s the project of some on the left, can it be done by just raising taxes on the rich?

I think that’s a really important question — a long-term question of the financing sustainability of the tax system. This topic is even more important given our current safety net, Social Security, and Medicare programs, plus the question of how they are going to finance an expansion of those programs to cover the costs of the trillion-dollar Child Tax Credit Plan currently being established. That’s not to mention the costs of other initiatives that are somewhat popular.

From an economics perspective, I don’t think it’s sustainable to expect to continuously finance the current fiscal projections that we have — and certainly the future enhanced programs currently being discussed — only by raising taxes on households that make $400,000 or anything like that. It’s much more economically damaging, and at some point is literally not doable. There’s just not enough money. So it’s concerning when Democrats put themselves in a box of demanding that tax increases only come from a very small segment of the taxpayers.

Obviously, most of that is talking about the rich paying more versus the middle class, and the middle class includes people who earn $399,000 apparently. But it’s this other notion — that there’re these protected groups that can’t pay or shouldn’t pay tax — that’s not sustainable in an economic or political sense. It goes back to this old idea that people should have skin in the game. I do believe in a progressive tax system. I believe that people at the top should pay more as a share than people at the bottom. But I also believe that having skin in the game is an important notion to hold onto. For example, a broad-base tax like the VAT tax is a very efficient and effective way to get more revenue from a broader base.

One of the ways that taxes will get raised in the next Biden spending package may be the corporate rate — from 21 percent to something maybe as high as 28 percent. If that were to happen, would it be an economically significant change?

The sky would not fall, but it would be an economically significant change. I don’t mean to oversell the next extreme doom-and-gloom scenario, but raising the corporate tax rate from 21 to 28 percent — which is in line with the views of the Biden and Obama administrations (in that 28 percent is the magic number) — could be problematic.

Via Twenty20

First of all, we don’t know with any high degree of precision what will happen. I don’t mean to suggest that 21 percent is the perfect rate, but as we raise the rate by seven points (a third) to 28 percent, we would see ramifications. We know that in our current income tax system, where we’re depreciating our investments over time, a raised corporate tax rate is essentially a tax on capital, one that taxpayers respond to that. There’s a consequence of the system.

So there’ll be lower after-tax returns on new investments. And that’ll discourage those investments, which are the very same investments that Democrats and Republicans want. Democrats aren’t against investment in the US — they’re in favor of it. What they seem to not appreciate, at least in my view, is that the consequences of tax policy are driving some corporate decisions with respect to where they locate their investments and how many investments they make.

Let’s say you have a couple of minutes with a member of Congress who doesn’t want to raise rates on companies and is a little skeptical about climate change. How do you make the case for a carbon tax?

A carbon tax is a fascinating policy. It’s one that I’ve thought about a lot and written about a little bit. To be honest, I think it’s a no-brainer. And to many public finance economists, it’s 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.

To me, one of the things that’s so interesting about a carbon tax is that you can be interested in it because you’re concerned about the climate. A lot of people are interested in it for that reason, because it’s a very efficient way to reduce emissions and address climate change. But it’s also a policy that could raise $1-2 trillion in revenue, so you could be interested in this policy without a care about climate because it offers you this financial opportunity. What do you want to do with $1 trillion or $2 trillion in new revenue? You could cut the corporate tax rate. You could cut the capital gains tax rate. You could finance the repeal of the estate and gift tax. You could finance the expansion of the Child Tax Credit, or the seeds of the expanded Child Tax Credit that were just planted in the bill last week. You could fix the roads and bridges. Or you could do a little bit of a lot of those things. But depending on how you choose to use that money, you’ll have different economic consequences. That’s a problem I think a lot of lawmakers would find appealing and want to try and solve. They could even pay down the deficit. I doubt that they would, but they could.

So I think there’s both a climate conversation to have about a carbon tax, about the efficiency of using market tools and mechanisms relative to the command-and-control strategies of regulations that are neither durable nor cost-effective. And then there’s a non-climate conversation. The non-climate conversation is essentially “What do you prefer, to raise the corporate tax rate to 28 percent or to impose a carbon tax?” A carbon tax not only mitigates some of our climate challenges, but also prevents us from needing other more costly tax increases.

What are the most common concerns about a carbon tax? Are they legitimate?

One of the concerns that some policymakers express is the same concern they have about any new tax — that it’s just a money machine for Washington. And if we opened the door to creating a new tax, then that’s going to somehow lead to bigger government over time. One way to mitigate that is with a revenue-neutral carbon tax, where you’re simultaneously reducing another tax so that you’re not increasing the size of government or the size of revenues flowing into the government. That doesn’t always satisfy everyone because they say, “Well, you just cut the other tax. It still exists and now there’s a second tax. So now there’re two dials that can be turned up by a future Congress to raise taxes.” I don’t think that’s true, but I know that’s one of the concerns sometimes expressed.

Another concern that I hear sometimes is, “Well, what should that carbon tax be? What’s the right rate? Should it be $20 a ton, $10, $5, $50, $500?” There’s a big debate about what the social cost of carbon is and how we know the correct way to set this tax rate. I think that’s a hard question to answer, so I’ll give a simple answer: I know that the correct rate is not $0. Today, the tax rate on carbon is $0, and I know that’s wrong. I believe that has to be wrong. I’m not sure, honestly, if it should be $20 or $40 a ton, but let’s start with a carbon tax rate that’s the best guess without over-guessing and see what happens. It may turn out to be a more effective tool than we anticipate.

So maybe we don’t need to have $100 a ton carbon tax — maybe $20 will do the trick. But let’s start by not taxing carbon emissions at $0 and just working out a more fixed price over time by seeing the responses of innovators and their new technologies and the responses of the consumers.

More broadly speaking, what do you think Republicans want to do about taxes going forward? Do they want to get rid of the corporate tax? Do they want a flat tax? What’s their big tax plan for the future?

That’s a great question. When I first came to Washington in the late ‘90s, there were so many conferences that held debates over exactly what you’re talking about: “Is it the fair tax or the flat tax?” “Is it the VAT tax or the USA tax?” “Which one is going to grow the economy the most?” To many economists, these policies were all economically very similar. Some of them were easy to administer, others impossible. And there was just a lot of yelling, which reflects that, each candidate needed their own thing. But actually, these things were all kind of the same in some respects.

Surrounded by fellow Republicans, Speaker of the House Paul Ryan speaks about the Republican tax plan in the U.S. Capitol in Washington, U.S., September 27, 2017. REUTERS/Kevin Lamarque

That is gone. There’s very little “fair tax” chatter now. There’s very little “USA tax” talk, universal savings account proposals, or various ideas over how to rip the code out by its roots — to, as one former chairman of the House Ways and Means Committee used to say, “Start all over from scratch with consumption taxes versus income taxes.”

Now Republicans are for something a lot less sexy, which is 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 2016 and 2017 in an effort led by House Republicans to have a fundamental income tax reform. But what we ended up with — as is always the case at the end of a legislative process — was less than we set out for at the beginning. At first, there were going to only be like three tax rates, and then they ended up with the same number that we have now, six or whatever it may be. And while we ended up with lower rates overall, there was a lot of compromise.

Now, I don’t mean to say that the legislation in 2017 was not a step forward. I think it was progress, in large part because the corporate tax rate came down so much.

I feel like we’re in a lull of tax chatter. But if the fiscal situation continues to deteriorate, it’s going to be very hard to efficiently raise a lot of money in the current system. If we reach that point, I assume ideas for big, bold tax reform will be back at some point.

I think so. And I think that this issue around the carbon tax will be one of those ideas. It will especially be appealing if it is seen as superior to an alternative idea. When considering it alone, to Republicans it may seem like the question is, “Hey, do you want a new tax?” Their answer would be, of course, “No, thank you.” But if the question is “Which of these taxes do you oppose the least?” or ‘Would you prefer this efficient tax that Congress gets to control or this regulatory framework that the executive branch gets to control?,” I think things like a carbon tax become much more appealing than before.

My guest today has been Alex Brill. Alex, thanks for coming on the podcast.

Thanks for having me, Jim. Good to talk to you.

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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US fiscal policy following the American Rescue Plan: My long-read Q&A with Alex Brill