Debt Digest | Biden’s Harmful Tax Increases Won't Fix Medicare and Social Security
Links & Fiscal Facts
Welcome to this week's edition of the Debt Digest. We’re excited to introduce Ivane Nachkebia, a new Research Consultant for Budget and Entitlement Policy, who’s joined our team. Iva is currently residing in Austria. You’ll be seeing his byline more often on this Substack. Feel free to say hi, share your feedback (which is highly valued), and send any relevant links our way (simply reply to any of our emails).
Here are this week’s reading links and fiscal facts:
Biden’s harmful tax increases won’t fix Medicare and Social Security. In his Fiscal Year 2025 budget request, President Biden proposes raising the Medicare tax rate for individuals making over $400,000, increasing the Net Investment Income Tax (NIIT) from 3.8 percent to 5 percent, and closing Medicare tax loopholes. These measures, combined with strengthening Medicare’s power to negotiate prescription drug prices, aim to extend the Hospital Insurance trust fund solvency by 25 years. The budget also broadly addresses Social Security, proposing that “high-income individuals pay their fair share” while opposing cuts to either program. As Manhattan Institute’s Brian Riedl argues, taxing the rich to address the funding shortfalls of entitlement programs “has no basis in mathematical reality” [...] if these programs aren’t reformed the middle class will have to shoulder the burden [...]” Additionally, as we have previously covered, raising taxes, especially on investment and working, slows economic growth, harming people at all income levels.
Tune in at 2:30 pm ET today to watch Cato’s Romina Boccia testify before the Joint Economic Committee. Titled “The Fiscal Situation of the United States,” this hearing is presided over by the Committee Vice Chairman David Schweikert (R-AZ) and will further hear from Michael Faulkender (America First Policy Institute), Michael Linden (Washington Center for Equitable Growth), and Dr. Kimberly Clausing (UCLA School of Law). You can watch it live on the Committee website and YouTube.
Enhancing transparency in the appropriations process. Congressman Glenn Grothman (R-WI) has introduced the Appropriations Transparency Act, legislation that would provide the public and legislators with relevant information about appropriations before Congress votes on these bills. “Members of Congress and the public deserve to receive complete, and easily digestible information about what’s included in appropriations bills before they are enacted. More transparent reporting is especially critical as Congress has gotten into the bad habit of relying on budget gimmicks, from changes to mandatory programs and inappropriate emergency designations, to evade agreed-upon spending limits. The Appropriations Transparency Act would release CBO scores of appropriations bills to promote greater transparency and accountability for fiscal restraint,” says Boccia.
Bidenomics’ dependence on borrowing poses economic risks. George Mason University’s Tyler Cowen, in his recent piece for Bloomberg, argues that Bidenomics heavily relies on subsidizing private investments with borrowed money, betting on the eventual success of these investments to offset the accumulated debt. According to Cowen, “It is always possible to boost wages and employment in the short run by funding new investments with borrowed money. The critical question is whether those investments will succeed in the long run.” Banking on the success of these investments, which Cowen considers highly questionable, amidst record-high projected debts, is extremely risky. As we have previously covered, growing debt crowds out private investments.” Even assuming possible benefits from increased federal borrowing, [...] debt crowd‐out results in lower economic output and incomes,” wrote Boccia and Lett.
A questionable $337 million provision in the appropriations minibus. Paul Winfree, from the Economic Policy Innovation Center (EPIC), identified a provision in the recently passed appropriations minibus bill to provide an additional $337 million in funding to the National Telecommunications and Information Administration (NTIA). These funds are meant to finance the increase in the NTIA’s salaries and expenses. However, Winfree questions the rationale behind the provision, arguing that “[the additional funding] is nearly two times the amount that the agency normally requires for salaries and expenses.” Taylor Barkley, from the Center for Growth and Opportunity at Utah State University, suggests that: “the logical conclusion is that these funds will be redirected from supporting broadband deployment to increasing regulatory scrutiny of AI.” The ambiguity surrounding this provision illustrates that funding requests should be supported by clear justifications that are readily accessible to the public.
Medicare and Social Security’s unfunded obligations increase. The Financial Report of the United States Government projects that Medicare and Social Security’s unfunded obligations (present value costs minus dedicated revenues) total $78.3 trillion over the next 75 years, which is $2.4 trillion more than last year’s estimate. The report also provides the unfunded obligation over an infinite horizon. The 75-year projection underestimates the total unfunded obligation because it includes taxes that will be paid by the next three generations of workers without accounting for the benefits they will receive over their lifetime. Extending the projection period increases the funding gap, with the shortfall for current participants equaling $105.4 trillion. Adam Andrzejewski from OpenTheBooks illustrates this in the graphic below.