The President’s Budget

Eakinomics: The President’s Budget The Biden Administration will release the president’s budget today, a month after the statutory deadline for its submission to Congress. Actually, the administration will release part of the budget. Even though it is late, the full volumes, including the detailed appendix, will not be released until next week. The real mystery is: Why? Expect the budget to be a warmed-over version of the Build Back Better agenda that failed to get through Congress. Expect another round of child care subsidies, federal paid leave for workers, universal pre-K, free community college, a mega-sized child credit, and more new entitlements. Under these proposals, federal spending will likely be projected to reach a record share of gross domestic product (GDP). It will be a testament to profligacy in public finance, but it will not be new and it is hard to understand why a rerun should arrive so late. Of course, that is not how it is being advertised. Allies including The New York Times are pushing headlines such as “Biden Is Set to Detail at Least $2 Trillion in Measures to Reduce Deficits.” This is just code for “we promise to tax, tax, tax even more than we intend to spend, spend, spend.” And if the Build Back Better experience is any guide, it will lower measured deficits over the next 10 years, but will build an even larger structural deficit for the future. The administration’s approach to Medicare is instructive. The part of Medicare that is facing financial difficulty is the Part A program that covers hospital (inpatient) care. It has a payroll tax that is deposited into a trust fund, out of which providers are reimbursed for care. At present, spending exceeds the payroll taxes – this deficit contributes to the overall federal red ink – and the trust fund will run out of money in the next 5 years. A real, lasting reform would be to address the costs of hospital care and bring spending into line with the tax finance. Is the administration doing anything on this front? Nope. A real, principled liberal reform would be to raise the payroll tax, ensuring the financial sustainability of the reform and keeping the principle that the beneficiaries contribute to covering the costs of care. Is the administration raising the payroll tax? Nope. Instead, the administration proposes increasing the net investment income tax (NII) invented by the Affordable Care Act (ACA) from 3.8 percent to 5.0 percent. The NII has always been bad tax policy as it has its own base and rate that are not coordinated with the income tax (and notably, has thus far never been used to shore up the Medicare trust fund). In addition, the administration is proposing to expand the NII to cover some of the earnings from sole-proprietorships, partnerships, and other pass-thru entities. Since over one-half of business income is taxed through pass-thru entities, this is simply a large tax increase on small businesses. Far from being a responsible entitlement reform, it is an undisciplined and damaging money grab. Oh, and as a bonus, the president proposes to double down on the price controls recently enacted in the Inflation Reduction Act and expand the number of drugs subject to price “negotiation.” The federal budget outlook is a serious problem. It deserves better than the unserious effort about to be launched by the White House.