Analyzing the $3.5 trillion budget reconciliation package

Maya MacGuineas, President of the Committee for a Responsible Federal Budget, joins Yahoo Finance to discuss the latest federal budget proposal.

Video Transcript

- Welcome back. Let's get to the latest down in DC, because House Democrats are releasing details on their proposed tax increases today. They're using this, or they hope to aim to offset the $3 and 1/2 trillion in spending. Now, some of the items in this, a corporate tax rate of 26 and 1/2%, that would be up from 21%. Three percentage point surtax on top earnings. Also a capital gains tax increase.

So we want to talk about this with Maya MacGuineas, president of the Committee for a Responsible Federal Budget. And Maya, it's good to see you again. I guess, first, just your initial thoughts on what the House Democrats have put forward. A higher corporate tax rate, also accompanied with a three percentage point surtax on top earnings, a capital gains tax increase, amongst other things that were put forward in this plan.

MAYA MACGUINEAS: So overall, what we're seeing coming out of the committee so far does not appear to be anything close to good for the bottom line of the country. And let me explain that. So we already know that the fiscal situation is unsustainable. We're on track to borrow $12, $13 trillion over the next 10 years, if we don't do anything that makes that fiscal situation worse. We're now talking about some very large policy initiatives. The good news being that the White House had put out the marker, these are going to be fully paid for.

But once you get into the details, it's a lot easier to talk about popular spending items that people really like than it is for the pay-fors. And now that we're starting to see some of the details on the pay-fors, what's coming out of the committee is a lot more in tax breaks. And very importantly, a lot less on the actual revenue raisers. So all those things, the taxes on individuals, on corporations, the tax gap, which is a really sensible way to think about closing some of the difference between what's owed and what's actually paid. Many of these things are less than what the White House was proposing.

And overall, while the White House was talking about net savings from taxes of about $2 and 1/2 trillion to help offset these costs, Ways and Means is talking about something closer to $900 billion, making the big fiscal gap even larger.

So bottom line is, once you get to how you actually pay for things, that's when the real work of budgeting begins. And that's when you see the tough choices aren't nearly as popular on how to pay for things as they are what things to spend money on.

- Maya, we have this discussion. Those of us who are over the age of 50, we've had this discussion for the last four decades. But I've got to ask you, how do you convince people? When I throw out that number, $910 billion by 2031, according to the committee. That's just the interest payment on the national debt. How do you convince people who say, no big whoop? I mean, right now, we're paying $330 billion. How do you get those people to understand that that could be a real problem?

MAYA MACGUINEAS: Well, let me be frank. We're not doing a very good job of convincing people of that. Because if you look at every year, the country borrows more money than is wise, given that we already have near-record levels of debt. And there are many reasons that we should all be concerned about this.

Now, we just went through the COVID emergency. We borrowed trillions and trillions of dollars. That's exactly where we should have been. You want to be prepared for moments like that so you can borrow when you need to, when there's an emergency, and when the economy needs borrowing to help prop it up. That's not where we are now, that's not where we were in the years before COVID hit. And yet we are borrowing trillions then, and we appear poised to borrow trillions now.

The problem is that all this borrowing weakens the economy, leaves us vulnerable to new emergencies, leave us vulnerable on a geopolitical stage, as we're competing with other nations around the world. Both in terms of national security and to maintain our position as an economic superpower having the currency that is the safe haven. All of those things are jeopardized by high levels of debt.

But it doesn't seem front and center to most families who are thinking about cost of health care, retirement, education. And it's very hard to make that connection, but that connection could not be stronger. The fiscal health of the country is the very foundation of our economic strength. And if we continue to borrow where we are, we are going to chip away at the standard of living in this country. In fact, we probably already have. But we're also going to weaken us for many more vulnerabilities.

But the problem is, we don't have politicians who want to talk about those things. We have politicians who are so busy fighting with each other as two teams, they want to give-- both sides want to give away, whether it's tax cuts or spending increases, and not talk about, again, that kind of real work of budgeting. If something's worth doing, it's worth paying for. How do we want to pay for it?

- Yeah, Maya, I wanted to ask you about that, because we've seen spending from both sides of the aisle. Both Democrats and Republicans have been looking to spend pretty aggressively in recent years. So I guess from your perspective, is either side, is either party, I guess, interested in really figuring out how to pay for these types of things?

MAYA MACGUINEAS: There are members within both parties who care about it, but certainly not would I say that it's a party priority for anybody right now. Political leadership is usually not very focused on this issue. And again, there's political payoff in promising people lots of things and not having them pay for it. And one of the big issues we struggle with, I think, in terms of governance is how you get us to do the right thing that work for the long-term, not just the media. How you do good policy rather than good politics.

And I think the high levels of polarization undermine our ability to tackle any of the toughest challenges in the country right now. Fiscal is obviously the one I focus on, but there are many others. Whether it's climate, cybersecurity, all of these things which we need to be thinking about, the choices to make today to strengthen us for tomorrow. Borrowing $1 trillion to $2 trillion every year, even post-COVID, which is what we are on track to be doing, that's not going to strengthen us in any way. That's going to weaken us tremendously to deal with all of those other issues.

And let me just say, that doesn't mean that the important objectives that are being talked about in these bills, whether it's infrastructure or other investments in human capital, for instance, it doesn't mean they're not important. Many of them are incredibly important, and we'll all have different preferences for where we should be spending money. But if something's important enough to do, you have to do this hard work of figuring out how to pay for it.

And what we're seeing coming out of the Ways and Means Committee right now really indicates that lawmakers aren't willing to kind of back up all the things that they want to spend money on with a plan to pay for it. Instead, punting and asking someone else down the road for it.

- Is it a poison pill when they talk about, the headlines say 3% surcharge tax on income over $5 million. But what they don't follow up with is a tax on couples, married people, who have combined income of $450,000. That could hit a lot of Americans. Is that, do you think, a no-starter in Congress, that they just, "eh, we'll borrow, we don't need to do that"?

MAYA MACGUINEAS: You know, I think more and more things become non-starters the more politicians promise not to do things. We shouldn't be taking anything off the table, including-- I know that the president's commitment not to raise taxes on anybody, any family below $400,000, that that's quite popular. Of course it is, to protect us from taxes is popular. But none of them are really very realistic, until we determine how much money we want to spend.

So the way that we should do this, I kind of call it "build a budget." But think about what revenue-raisers are we willing to do? Are we willing to do that surtax? Are we willing to raise taxes on corporations, individuals, deal with the tax gap, raise carbon tax, get rid of tax breaks? Are we willing to cut other spending? Figure out how much money we're actually willing to come up with a pool for money, and then the most important priorities on what to spend it. Everything is kind of a poison pill on its own. You have to compare it to what it would go for, for people to decide whether those changes are actually worth it.

But I do think we have another problem right now, which is people are very eager to raise taxes on anybody but themselves. And if we're going to be realistic, there's not enough money just from the very, very wealthy in this country to come anywhere close to financing the huge expansive agenda that's being discussed. So if you want to grow government a lot, you're going to have to grow taxes a lot. If you want to have a smaller government, then taxes will be lower, but you're going to have to cut a lot of the spending. There's no avoiding those hard choices anywhere.

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