It's Too Late for MMT-Inspired Budgeting
Democrats should pick the low-hanging revenue fruit and grab some easy cost-savings by allowing Medicare to negotiate drug costs.
In my recent three-part series on the Congressional “pay-for” game, I lamented the Congressional budgeting process, which is antithetical to MMT. I explained that it’s mostly political theatre, masquerading as “sound finance.”
In the realm of the theatric, we’ve seen some peacocking from various democrats, including Rep. Stephanie Murphy (FL), who is voicing concerns about the pace at which things are moving, the overall price tag, and the yet-to-be-hammered-out “pay-fors” in the proposed $3.5 trillion Build Back Better plan.
On the Senate side, all eyes remain focused on Sen. Manchin (D-WV), who recently called for a “strategic pause” on the entire effort. Manchin’s theatrics were punctuated by comments from House Majority Whip, Rep. James Clyburn (SC):
“I think what has happened here is that the communication around this Build Back Better plan, which has a ceiling of 3.5 trillion — is just that, a ceiling. No one has ever said that's an exact number or that's a floor. It's up to 3.5 trillion. Now, I see that Joe Manchin has mentioned a $1.5 trillion number. So, somewhere between 1.5 and 3.5, there is $2 trillion. Those $2 trillion are there. And I think that there’s a lot of room for people to sit down and negotiate.”
That’s what lawmakers are doing now.
At the heart of those negotiations lie two basic questions: How much can democrats agree to spend? And how much of that spending should they aim to offset in order to avoid adding to the deficit?
The answer to the last question is partially baked into the budget resolution framework. That framework gives specific guidance to 13 House and 12 Senate committees to begin drawing up legislation for a $3.5 trillion reconciliation bill. The quick-and-dirty version is summarized in this memorandum to Democratic senators. While the memo asserts that the entire package will be “fully offset by a combination of new tax revenues, health care savings, and long-term economic growth,” the resolution itself only requires the finance committee to fully offset its spending.
None of the other 11 senate committees are required to offset anything. What this means is that the budget resolution framework gives lawmakers the option to let half of the entire package--$1.75 trillion--dribble onto the deficit over time. If you have the appetite for the legislative minutiae, Wendy Edelberg breaks it down nicely (around the 10 minute mark) here. From an MMT perspective, there’s no inherent problem with that. Indeed, it isn’t clear that any of the $3.5 trillion requires offsets. But that ship has sailed.
While the thought of adding to the deficit doesn’t spook everyone in Congress, it remains a potential sticking point for people like Joe Manchin, who reportedly gets daily updates about the national debt from one of his Senate aides.
At this point, the goal for Democrats is to find a way to get the $550 billion bipartisan infrastructure package (which has already passed the Senate) and a $3.5 trillion budget reconciliation bill to Biden’s desk as quickly as possible. The vast majority of Democrats feel a sense of urgency to deliver.
Full Speed Ahead
When asked about Manchin’s call for a “strategic pause,” Senate Majority Leader Chuck Schumer (D-NY) told reporters, “We’re moving full speed ahead.” When speed is your goal, friction is not your friend.
Here’s how Schumer describes the frictions he’s facing:
"There are some in my caucus who believe $3.5 trillion is too much. There are some in my caucus who believe it's too little," he said. "And we're going to work very hard to have unity, because without unity, we're not going to get anything."
Unity is vital. Without it, democrats can’t push through a spending package of any size. They need all 50 democratic votes to use reconciliation in the Senate, and they can’t afford to lose more than three democrats in the House. They’re walking a tightrope, and President Biden’s domestic policy agenda hangs in the balance.
As we speak, the legislative mark-up process is underway and committees in both chambers of Congress are moving forward using the $3.5 trillion outlined in the budget resolution. Many democrats, like Congresswoman Pramilia Jayapal, are in no mood to negotiate that number down. As she put it:
"There is no flexibility on the price tag."
"And it's not because I care about what the top line is. It's because I care about delivering on these benefits. If we don't deliver, then I think all of the people who came out and voted for Democrats to take control of the House, the Senate, and the White House are going to come out and say, 'that's it.'"
You might be thinking, “Yeah, but Manchin already said he won’t support anything close to $3.5 trillion, so it can’t happen.” “
President Biden’s chief-of-staff, Ron Klain, has described Manchin as “very persuadable.” Sen. Amy Klobuchar (D-MN) agrees. She notes that it may take some time and effort to persuade Manchin to vote for the package but that he eventually “gets to the right place.” It was, after all, only eight months ago that Senator Manchin was calling for up to $4 trillion in infrastructure spending.” Here’s what he said in January 2021:
"The most important thing? Do infrastructure. Spend $2, $3, $4 trillion over a 10-year period on infrastructure.”
So let’s assume that the size of the reconciliation package remains close to $3.5 trillion. Democrats will haggle over the scope of some of its provisions, but the big frictions will arise--as they always do--on the “pay-for” side.
Biden has been clear from the beginning. To offset the proposed $3.5 trillion, Congress will target wealthy Americans and large corporations. “No one making under $400,000 will see their federal taxes go up. Period,” Biden has pledged.
Taxing the rich to “pay for” the Build Back Better agenda is wildly popular . . . among voters.
The friction is inside the beltway, where lobbyists and other special interest groups are doing everything they can to persuade lawmakers to limit the ‘hardship’ on corporations and higher-income earners. I’m talking about people like Neil Bradley, executive vice president and chief policy officer at the Chamber of Commerce, who hopes to see the $3.5 trillion package collapse “under its own weight.” In his view:
“[T]he proposed tax increases are unprecedented but also inadequate to pay for all the programs while complying with Senate rules on budgeting.”
And while he might be right about the unprecedented nature of the Biden administration’s proposed tax increases, he is surely wrong about it being impossible deliver an adequate list of so-called “pay-fors” that comply with Senate rules.
As Easy As 1-2-3
Remember that the $3.5 trillion budget resolution framework instructs lawmakers to come up with $1.75 trillion in offsets, leaving open the option to allow the remaining $1.75 trillion to dribble onto the deficit over 10 years. Senate rules allow the deficit to increase inside the 10-year budget window. It should be pretty easy for Democrats to comply with all of that.
As we saw with the bipartisan infrastructure deal, offsetting some of the spending is probably easier than offsetting all of it. While the bipartisan group--which included Joe Manchin, by the way--started off hoping to arrive at a “hard” infrastructure bill that was fully “paid for,” they ended up agreeing to offset only about half of the proposed spending.
While unprecedented tax hikes on corporations and wealthy Americans are incredibly popular with voters, there isn’t a huge appetite--even among many Democrats in Congress--to raise a slew of taxes. At the end of the day, Manchin and others found it more palatable to offset part of the spending and let the rest fall onto the deficit.
Don’t rule out something like that happening again. In fact, that’s exactly what House Speaker Nancy Pelosi recently channeled:
“We will pay for more than half, maybe all of the legislation.”
That’s not a very heavy lift. And if Manchin (and others) insist on going all the way, then just do these three things.
Enforce existing tax laws: This has to be the lowest-hanging “pay-for” fruit on the tree. Lawmakers could have used it to offset the cost of the bipartisan infrastructure bill that passed the Senate last month, but Republicans wouldn’t go for it. So this big, juicy “pay-for” is now available for use in reconciliation. And it doesn’t even require a tax increase. All you have to do is enforce the laws that are already on the books.
Natasha Sarin, Deputy Assistant Secretary for Economic Policy, just released this handy explainer. It’s all about the “tax gap”—i.e. the difference between taxes that are owed and collected. She estimates that the gap is around $600 billion annually. (The IRS Commissioner puts it closer to $1 trillion per year.) Sarin says it amounts to approximately $7 trillion of lost tax revenue over the next decade. She also points out that the tax gap is a “major source of inequality,” which means it’s worth addressing--from an MMT perspective--independent of the “pay for” game.
To narrow the tax gap, the Biden administration wants to provide the IRS with an additional $80 billion to improve taxpayer services and to help the agency go after high-income tax cheats. Sarin estimates that this would raise $780 billion over 10 years and an additional $1.6 trillion over subsequent decade. If Democrats could count all $2.4 trillion in additional revenue against a $3.5 trillion reconciliation bill, they’d be about 70 percent of the way there.
Raise the corporate income tax rate to 25 percent and impose a 15 percent global minimum tax on ‘book income’ for corporations with at least $100 million in annual income: Republicans lowered this rate from 35% to 21% as part of the 2017 Tax Cuts and Jobs Act (TCJA). Vermont Senator Bernie Sanders (and a relatively small group of other Democrats) wanted to restore the rate to 35 percent. That never stood a chance. Biden’s plan called for an increase to 28 percent, which would have raised about $1.3 trillion over 10 years. But that also met with too much friction. What appears to have broad support is a 4 percentage point increase in the corporate tax rate. Raise the rate to 25% and Democrats can count another $600-$700 billion in offsets. And if Democrats want to stop large, profitable corporations (like Nike and FedEx) from paying nothing--zero--in federal income tax, then they can support Secretary Yellen’s push for a global minimum tax. That could generate another $200-$300 billion in offsets.
Let Medicare negotiate the cost of prescription drugs: The same legislation that expanded Medicare to include prescription drug coverage in 2003 also prohibited the federal government from lowering drug costs by negotiating prices with drugmakers. Apart from those who work in the pharmaceutical industry, those who lobby on their behalf, and those who benefit from their campaign contributions, almost no one thinks this makes any sense. Indeed, the Kaiser Family Foundation recently found that almost 90 percent of those polled would like to see Medicare negotiate drug prices. It’s wildly popular, and it generates hundreds of billions in offsets.
CBO has estimated the cost savings (over 10 years) at between $450 billion and $530 billion, depending on how many drug prices (25 vs. 50) Medicare is allowed to negotiate.
So where does that leave us?
Taking the Treasury Department’s conservative estimate on enforcement, together with CBO’s most recent estimate on drug price negotiations and an average revenue estimate for corporate tax increases, we end up with just over $2.2 trillion. That’s enough to offset well over half of the proposed $3.5 trillion.
But will it be enough for conservative Democrats, like Joe Manchin, who, just yesterday, raised concerns about “paying for” only half of the $3.5 trillion?
That’s where the rest of the enforcement money comes in. I don’t see Senator Manchin embracing MMT in time to get him over his obsession with debt and deficits. But perhaps he could persuade himself to look beyond the conventional 10-year budget window and factor that $1.6 trillion in future enforcement revenue into his calculations.
I worked for the Senate Budget Committee, so I know that nothing is as easy as 1-2-3 when it comes to any of this stuff. But I also know that the clock is ticking. And I know that friction is the enemy of progress. So I offer this three-step plan in the spirit of making progress.