Study: Democrats’ $3.5 Trillion Spending Bill With Tax Increases Would Cause Economic Decline

tax increases economic decline

By Casey Harper (The Center Square)

House Democrats have unveiled a litany of new tax proposals to fund President Joe Biden’s $3.5 trillion federal spending bill, but a new report suggests the spending plan would shrink the economy.

The University of Pennsylvania’s business school, Penn Wharton, released a new budget model based on the Democrats’ plan that projects a major decrease in Gross Domestic Product (GDP) in the coming years if the plan were to pass.

“Drafting a budget from the August 2021 Senate reconciliation framework that satisfies the Senate rules of reconciliation (“Byrd Rule”) will require a decrease in new outlays or a large increase in revenues (or both) after the standard 10-year budget window,” the report said. “One such potential reduction in spending would allow the new non-healthcare-related discretionary spending provisions to expire after 2031. With this reduced spending in 2031, we project that the reconciliation package will decrease GDP by 4.0 percent in 2050. Without this spending decrease (and where the Byrd Rule is not satisfied), we project a 4.8 percent fall in GDP in 2050.”

House Democrats on the Ways and Means Committee released a series of tax hikes that would fund the spending plan, including a new tax on tobacco and an increase in capital gains taxes.

The plan would include a 25% tax on dividends and capital gains for single people making more than $400,000 annually or married couples making $450,000. Republicans have argued this violates Biden’s pledge, since it will be taxing one or two spouses making less than $400,000.

Democrats also proposed raising the top income tax rate to 39.6%, up from 37%, which would hit the same incomes as the capital gains tax.

Republicans lambasted the tax increases, which would fund a long list of “human infrastructure” projects they say are unnecessary.

“This isn’t about corporations or the wealthy, it’s about workers,” U.S. Rep. Kevin Brady, R-Texas, said during the House Committee meeting on the legislation earlier this week. “It’s about families and customers, retirees, and communities that our businesses invest in. They bear the burden. They always bear the burden.”

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Republicans also pointed to the Penn Wharton report, arguing the deficit spending and tax hikes violate Biden’s promises on the campaign trail.

“President Biden pledged not to deficit spend, citing a need to protect the economy – but this reconciliation package leads to an 8.9 percent increase in government debt,” Republicans on the House Ways and Means Committee said in a statement.

Penn Wharton identified the major spending items that require a significant increase in federal revenue or a cut in spending elsewhere to offset the new expenses.

“Health expenditures are the largest spending category and capture 32.4 percent of the new spending within the budget window,” the report said. “Health expenditures include the expansion of Medicare benefits, lowering of the Medicare eligibility age, expansion of the Affordable Care Act (ACA), and enactment of prescription drug price controls. Approximately 31.0 percent of the proposed spending enters the model through transfers and tax expenditures, which includes policies such as public housing investments, energy subsidies, and the Earned Income Tax Credit and Child Tax Credit extensions. Spending that boosts labor productivity, which includes human capital investment policies such as preschool and childcare, is the next largest input category, receiving 13.2 percent of the $3.5 trillion of new spending over the 10-year budget window.”

One tax that has drawn the attention of critics is a major tax increase on vapes, tobacco, cigars and cigarettes. Opponents argue this tax violates Biden’s pledge to increase taxes only on the wealthy because it will affect millions of Americans making well below his $400,000 a year promise.

“This provision doubles the current rate of excise taxes on cigarettes, small cigars, and roll-your own tobacco,” the Democrats’ tax proposal document said. “The provision changes the tax on large cigars from an ad valorem basis to a weight basis at the rate of $49.56 per pound, but not less than 10.06 cents per cigar. The provision provides larger increases in tax on smokeless tobacco (i.e., snuff, chewing tobacco, and pipe tobacco) and a new tax on discrete single-use units at the rate of $100 per thousand. Finally, the provision imposes excise taxes on ‘taxable nicotine’, which is any nicotine (other than nicotine used in listed tobacco products) that has been extracted, concentrated, or synthesized.”

Read Next: Biden Appears To Break Promise To Not Raise Taxes On Americans Making Less Than $400K

Syndicated with permission from The Center Square.

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