Missed By That Much…

The editors of Bloomberg remark on President Biden’s budget. In general they support it but they find a few defects:

The plan is right to raise taxes more than spending — enough to curb borrowing and stabilize the ratio of debt to gross domestic product at 106% by 2029. That’s much better than the current baseline, which shows debt rising from 99% of GDP this year to 117% by 2034, with more to follow.

Yet the budget’s forecasts optimistically assume strong and steady growth over the coming decade. A downturn would drive debt higher. Starting out with a ratio pinned at well more than 100% of GDP — the highest since just after World War II — leaves no space for emergency fiscal expansion. When the economy is at full employment and growing well, public debt should be falling.

and the numbers don’t add up:

First, after 2025, many of the measures included in the Tax Cuts and Jobs Act of 2017 will expire. Biden’s plan relies on the revenue that would result despite promising (no details) to extend the law’s changes for people making less than $400,000 a year. In effect, that hides a shortfall of $1.4 trillion. Second, Social Security is heading for insolvency in 2033. The budget promises to prevent this, but doesn’t say how — another big fiscal hole.

I thought these were their central observations:

Unrealized capital gains should be taxed at death, not erased by so-called step-up basis. Carried interest should be taxed like ordinary income. But smart reforms like this can’t do the heavy lifting. With households making less than $400,000 excluded, the biggest hauls come from taxing profits at 28% instead of 21% and from sharply higher taxes on the rich.

This strategy is questionable. Recent evidence suggests that former President Donald Trump’s corporate tax cuts spurred investment; over time, that means faster growth. And by international standards, the US personal tax code is already progressive. (Europe’s governments, having tested the limits of income taxes, rely heavily on broadly based consumption taxes to pay for their more expansive spending programs.) New taxes that fall heavily on capital formation and boost the rewards for tax avoidance are likely to hurt the economy and raise less money than the administration’s planners think.

They also don’t mention that public debt overhang tends to reduce GDP growth, something demonstrated empirically. Increasing public debt while relying on growth for solvency is a non sequitur.

The editors of Bloomberg are generally supportive of the president.