Economists project that President Biden’s first budget proposal would cut economic output by 1.1% over the next three decades if enacted.*
A report from Penn Wharton Budget Model — a project of the University of Pennsylvania’s Wharton School that evaluates public policy for fiscal impacts — suggests that the Commander-in-Chief’s budget would establish $5.9 trillion in new spending over the next decade, while only raising $3.9 trillion.
Relative to current law, the deficit spending would therefore cut gross domestic product — the amount of final goods and services produced by the United States within a given year — by 1.1% over the next three decades.
Under the current version of President Biden’s budget, the federal government would raise most of the $3.919 trillion through the following provisions:
- Increase the corporate tax rate to 28% — $892 billion
- Revise Global Intangible Low-Taxed Income (GILTI), disallow deductions attributable to exempt income, and limit inversions — $728 billion
- Tax compliance and registration — $480 billion
- Capital gains provisions, tax carried interest as ordinary income — $376 billion
- Repeal the Foreign Derived Intangible Income (FDII) deduction — $260 billion
Meanwhile, the majority of the $5.89 trillion in new spending would occur through the following programs:
- Research and development — $1.133 trillion
- Education — $854 billion
- Infrastructure — $1.031 trillion
- Individual tax credits — $853 billion
- Child care — $550 billion
- Long-term care — $400 billion
The Wharton economists note that the budget’s focus on transfers — payments that the federal government makes to individual citizens without receiving any good or service in return — would diminish economic output:
Spending earmarked toward affordable housing and home- and community-based care primarily has transfer effects. Affordable housing spending generally benefits households with below-median incomes, while caregiving provisions — mainly implemented through Medicaid — generally benefit older and Medicaid-eligible households. Transfers to working-age households let those individuals work less without consuming less, reducing overall labor supply, thereby creating a downward pull on GDP.
The budget also disincentivizes investment spending, thereby limiting other key growth metrics:
The net effect is a reduction in the capital stock of 3.6 percent relative to baseline in 2050. Lower capital reduces the wage rate businesses are willing to pay by 0.7 percent in 2050. Hours worked, therefore, decline by 0.4 percent in 2050 as workers choose to work less given lower wages. Overall, despite the boost to productivity from public investments, GDP is 1.1 percent lower than baseline in 2050.
It is unclear which sections of President Biden’s budget will be successfully passed by Congressional Democrats, who are currently attempting to enact a $3.5 trillion omnibus through budget reconciliation.
Although the maneuver requires lock-step loyalty from the fifty Senate Democrats, Sen. Kyrsten Sinema (D-AZ) revealed that she would not support the package due to its size.
On July 30, the Penn Wharton Budget Model issued a correction to its data. The new data ultimately projects a 1.1% cut to GDP over three decades instead of a 1.5% cut. This article has been updated to reflect the model’s new data.
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