The effects on deficit – Trump vs Biden

In this issue, we look at the report on the cost of Presidential campaign plans prepared by the nonpartisan Committee for a Responsible Federal Budget (CRFB).

This report was published on 7 October 2020. The benefit of the work of CRFB is that it gives us a nonpartisan comparison of the two sets of proposals.

Table 1

SOURCE:"The Cost of the Trump and Biden Campaign Plans", Committee for a Responsible Federal Budget, October 7, 2020

The judgement of what is contained in the Trump program and the Biden program is not as simple as it might first appear.

Trump has issued a 54 bullet point agenda, that calls for lowering taxes, strengthening the military, increasing infrastructure spending, expanding spending on veterans and space travel, lowering drug prices, expanding school and healthcare choice, ending wars abroad, and reducing spending on immigrants. He has also proposed a "platinum plan" for black Americans, which increases spending on education and small business.

Biden on the other hand, has proposed a detailed agenda to increase the spending on childcare and education, healthcare, retirement, disability benefits, infrastructure, research and climate change, while lowering the cost of prescription drugs, ending wars abroad and increasing taxes on high income, households and corporations.

Costing the Programs

The CRFB provides us with three separate estimates of the potential spending under both the Trump and Biden programs. These are a low-cost estimate, a high cost estimate and a central estimate. We will discuss the programs in terms of the central estimates for each program. In Table 1 above (Figure 2 of their report), we show the costing of the proposals under the central estimate for the Trump program and the Biden program.

The Deficits

Remarkably, there is little difference between the estimated budget deficits for both programs over a ten-year period from 2021 to 2030. The budget deficit for the Trump program is estimated to be $US4.95 trillion over a ten-year period. The budget deficit for the Biden program is estimated to be $US5.6 trillion over a ten-year period.

The very similar budget deficits suggest that the addition to real final demand of both programs is similar. Both would add similar amounts of deficit stimulus. This deficit stimulus would add similar amounts of employment in each case. The idea shown elsewhere that the Biden program might provide more stimulus, and hence more jobs, is not consistent with a bipartisan examination of the programs.

A Biden-Sanders Program?

The more familiar we become with the Biden program, the more we can see the influence of Bernie Sanders. In this election, the Democratic primary selection process was cut short by the intervention of the pandemic. The result was that Biden was selected as candidate only after considerable negotiation within the Democratic National Committee, between the supporters of Biden and the supporters of Sanders. The result is that the Sanders supporters have appeared to gain support of an enormous part of their proposals within the Biden program.

The effect is to increase both the components of "Tax and Spend" within the Biden program. Even though the size of the deficits is similar in the Trump program and the Biden program, the Biden program increases taxes by much, much more and increases spending by much, much more. The taxes selected and the spending selected, strongly reflects the populist nature of the Sanders supporters. There are dramatic increases in spending in the Biden program on childcare and education, healthcare and long-term care, social security and retirement plus major increases in spending on green projects. These green projects are referred to within the Biden program as infrastructure.

Were such proposals to be advanced within a European social democratic structure, they would be financed by an increase in value added tax. This would make the spending economically neutral in terms of its effect on growth. However, within the populist program advanced by Sanders, these proposals are paid for by dramatic increases in taxes on business and investment. These taxes have the result of damaging long-term US growth. Increases in marginal tax rates on high income earners also damage potential private investment.

Childcare and Education

A summary of the proposals within the Trump program and the Biden program is shown in Table 1 above. This is contained within Figure 2 of the CRFB report. Under the Trump program, spending on childcare and education increases the deficit by $US0.15 trillion. Under the Biden program, spending on childcare and education increases the deficit by $US2.7 trillion.

Healthcare and Social Security

Under the Trump program, spending on healthcare and long-term care reduces the budget deficit by $US0.15 trillion. Under the Biden program, spending on healthcare and long-term care increases the budget deficit by $US2.05 trillion. Under the Trump program, there is little change to social security and retirement, meaning that there is no change to the budget deficit. Under the Biden program, spending on social security and retirement increases the budget deficit by $US1.15 trillion.

Infrastructure

Under the Trump infrastructure program, $US2.7 trillion is added to the budget deficit. The objectives are to win the race to 5G and to continue to lead the world in access to the cleanest drinking water and the cleanest air. Trump has also proposed to invest almost $US20 billion in broadband and internet access. The program allocates $US9 billion to a capital revolving fund, $US75 billion to expanding surface transportation spending and $US190 billion to support major infrastructure investment. Additional spending would support expanding 5G, water and clean air funding.

Under the Biden infrastructure program, $US4.45 trillion is added to the budget deficit. Biden intends to invest in green infrastructure and American innovation. Biden's more recent "Build Back Better" calls for 100% clean energy by 2035. The plan would spend $US2 trillion over four years. Biden also proposes investing $US300 billion over four years to promote research and development of technologies such as electric vehicle technology, artificial intelligence systems and next generation communication networks, as well as $US400 billion over four years on Federal procurement of products made in the United States by domestic workers.

National Security and Immigration

Under the Trump program, national security and immigration adds $US0.3 trillion to the budget deficit. Under the Biden program, national security and immigration reduces the budget deficit by $US0.75 trillion. Biden proposes to take down most, if not all, of the Trump immigration program of the first term. Our understanding is that the savings, under the Biden program, would be to stop "building the wall". Trump of course, would continue "building the wall".

Tax Policy

Perhaps the biggest difference between the two candidates is on tax policy. This generates a very significant difference on how each of their programs would affect long term growth in the US economy.

Under the Trump program, tax policy adds $US1.7 trillion to the budget deficit. Trump proposes to cut taxes to boost take-home pay and keep jobs in America. At a minimum, Trump would support extending the provisions of the Tax Cuts and Jobs Act (TCJA) of 2017 beyond their 2025 expiration, as proposed in his FY 2021 budget. These extensions include a continuation of lower individual income tax rates and the Child Tax Credit (CTC).

Permanently extending TCJA provisions would cost $US1.25 trillion over ten years. Trump has also suggested repealing the worker side of the payroll tax, cutting middle class taxes by 10%, indexing capital gains taxes to inflation, reducing the capital gains tax rate to 15% and lowering the 22% individual marginal income tax rate to 15%. Our view is that the Trump policy supports investment and thereby enhances growth.

Under the Biden program, tax policy reduces the budget deficit by $US4.3 trillion. Biden would raise the corporate income tax rate from 21% to 28%. By broadening the base, he would lift total corporate taxes to above the level before 2017. This increase in corporate taxes must reduce the retained earnings that corporations have to invest. This action directly damages future growth in output, corporate earnings and individual wages. The CFRB estimates that these actions increase revenue by $US1.8 trillion over ten years.

Biden would also increase taxes on households making more than $US400,000 per year. First, he would increase the top income tax rate from 37% to 39.6%. He would also repeal the 20% deduction of pass through income (similar to Australian trust income). He would also tax long term capital gains and dividends as ordinary income at a rate of 39.6%, as opposed to the current law preferential rate of 20% for individuals and couples earning more than $US1 million. Importantly, Biden introduces an additional death duty, by increasing the capital gains tax on capital gains at death for high earners. The CFRB estimates that these increases of individual taxpayers would raise $US1.4 trillion of additional revenue.

Interest

The accumulation of debt under the Trump program worsens Federal interest rate payments leading the deficit to widen by $US0.25 trillion. The accumulation of debt under the Biden program worsens Federal interest rate payments, leading the deficit to widen by $US3 trillion.

The Deficit

The CFRB estimates a deficit under Trump of $US4.95 trillion over ten years and a deficit under Biden of $US5.6 trillion over ten years. Both have similar effects on increasing domestic demand.

The Cost of Populism

I have spoken before about the work of Kevin Hassett. Kevin Hassett was Chairman of the Council of Economic Advisors to President Trump in 2017 and 2018. This year he has been heading a team at the Hoover Institution at Stanford University. This team includes himself, Casey Mulligan, Timothy Fitzgerald and Cody Kallen. On 13 October, they published a detailed paper called "An Analysis of Vice-President Biden's Economic Agenda: The Long Run Impacts of its Regulation Taxes and Spending".

The report is detailed and damning. It concludes that in the long run, the Biden Agenda would reduce full time equivalent employment per person by around 3%, the capital stock per person by about 15%, real GDP per capita by more than 8%, and real consumption per household by about 7%. Relative to the Congressional Budget Office 2030 projection, this suggests there would be 4.9 million fewer employed individuals, $2.6 trillion less in GDP, and $1.5 trillion less consumption in 2030 alone. Medium household income in 2030 would be $6,500 less.

They argue that the Biden Agenda damages the US economy in three ways. Firstly, the attempt to move US transportation from a petroleum base to an electric base would require a lot more inputs. This also produces a slump in output for the same inputs. This would also result in a 1% - 2% fall in total factor productivity.

Second, the additional cost through regulation and changes in healthcare, would create labour wedges, which in turn would reduce output per worker. Third, the increasing taxes on capital would reduce capital investment. This reduces output per worker by reducing the level of capital per worker.

Conclusion

Both the Trump and Biden programs have large deficits of around $US5 trillion over the period 2021 to 2030. Both produce a large stimulus to the US economy.

Unfortunately, the Biden program also has costs which damage its benefits. It includes large business taxes and business regulation. These reduce employment by 3%, GDP per capital by 8% and living standards by 7%. Beware of leftwing populists bearing gifts.