I am neither an economist nor a psychic, so I cannot tell you if we will be panicking about inflation in six months. I just know that if we are, Joe Biden’s signature achievement will be in trouble. The Consumer Price Index is rising at a pace not seen in 12 years. Conservatives are rushing to compare Biden to Jimmy Carter. Top Federal Reserve officials, however, including Chair Jay Powell, believe the increase is a manageable reaction to the easing of the pandemic, like supply chain problems as things go back to normal or restaurants opening en masse, putting a run on waitstaff and line cooks. Biden administration officials side with the Fed but, as Bloomberg reported, they are worried that months of inflationary data will be a political disaster.
The Bloomberg dispatch cites an unnamed “Biden ally” who worries that the “biggest immediate political risk” is “rising consumer anxiety over inflation feeds into damaging support for Biden’s proposals for $4 trillion in longer-term economic spending.”
This particular concern strikes me as overblown. Rising prices in the spring of 2021 has little bearing on “longer-term economic spending” like the American Jobs Plan and the American Family Plan, which spread out their trillions over the next decade.
Getting everything he wants is Biden’s dream, though that’s a tall order with or without inflationary pressures. But getting some of his proposed infrastructure spending appears more than possible. Senate Minority Leader Mitch McConnell has said, “The proper price tag for what most of us think of as infrastructure is about 6-to-800 billion dollars,” and Biden has said, “I want to get a bipartisan deal on as much as we can get a bipartisan deal on,” which suggests a willingness to accept something in the realm of $800 billion.
If inflation fears were shaping Republican views on infrastructure, they would be screaming that this was the wrong time for any infrastructure bill. Instead they are signaling that they want an infrastructure bill, too. Negotiations may or may not succeed, but inflation is not preventing negotiation from taking place.
However, inflation fears could still throttle a key Biden goal—extending of expanded child tax credit beyond this year.
In the American Rescue Plan, the child tax credit was not only expanded, but also re-designed to distribute the credit with monthly checks, instead of claiming it once a year on your tax return. The White House argues that front-loading the payments allow parents to “cover household expenses as they arise.” Starting in July, most American parents will receive monthly checks of $300 for every child under 6, and $250 for every child between the ages of 6 and 17. The estimated annual cost is about $100 billion.
Since the American Rescue Plan law only expanded the credit for 2021, the checks stop after December, unless Congress passes an extension. Biden included such an extension through 2025 in his American Family Plan, a proposal which encompasses a range of investments in “human infrastructure.” But if the votes for the broader bills aren’t in hand by the end of year, pressure will intensify to take care of the child tax credit extension separately, before the monthly checks expire.
At the same time, if inflation is rising through December, so will fears of with more government checks adding more demand to too little supply. Soaring prices guarantee Biden will be slammed for pumping too much money into the system. The argument against an expanded child tax credit extension would gain traction, even though that would effectively be raising taxes on the bottom 98 percent in an election year.
But government spending won’t fuel inflation if it is offset by tax increases. Furthermore, before the recent inflation data, some moderate senators were concerned about spending. Two months ago, Senator Angus King, the Maine independent who caucuses with the Democrats, was asked about extending the souped-up child tax credit, and he responded, “How it would be offset? How would it be paid for? … I think we ought to start paying for things.”
Since the temporary child tax credit expansion was enacted by a partisan budget reconciliation bill, extending it will probably require the same. I’m more optimistic about bipartisanship than most. But even I would acknowledge that given the choice between helping salvage Biden’s legacy achievement that they didn’t support, or humiliating the Democrats, Republicans won’t be able to resist the latter.
That means Democrats need to rally their 50 Senators behind not just the extension of the tax credit, but also behind tax increases.
As I wrote recently, the main sticking point between the two parties on an infrastructure bill is also about how to offset the cost. Republicans and Democrats don’t have a philosophical disagreement about spending money on traditional infrastructure, but they do about how to raise the revenue for it. Biden proposes progressive corporate tax hikes and more aggressive tax enforcement to raise $2.5 trillion, or about $166 billion per year over a decade and a half. Republicans counter with increases in user fees, which lower- and middle-class Americans would have to pay, to cover the cost of a smaller infrastructure bill.
Unless Senators Joe Manchin, Kyrsten Sinema, and perhaps other moderate Democrats declare that bipartisan infrastructure talks are dead and they are prepared to use the reconciliation process, some compromise on taxes will be required. If an infrastructure bill is to be bipartisan, then it’s not going to be paid for by a partisan tax package.
But to extend the expanded child tax credit, a partisan reconciliation bill with a partisan tax package raising $100 billion per year will almost surely be required. And Democrats won’t want to tax middle-class families to fund checks for middle-class families. They will focus on the wealthy.
So why designate corporate tax hikes for infrastructure? Save them to pay for the child tax credit extension.
Biden has a tax plan to cover the costs of all his proposals. On top of the corporate tax hikes he wants to fund the American Jobs Plan, he proposes raising another $1.5 trillion over 15 years—or $100 billion per year—to pay for the American Families Plan. That money would come from both tax increases and more aggressive tax collection targeting wealthy individuals.
Perhaps Biden can draw the inside straight: the American Jobs Plan passes on a party-line vote via budget reconciliation by September, inflation fades by December, Democratic fears subside and another partisan reconciliation sends the American Family Plan to Biden’s desk.
But if moderate Democrats insist on a narrower, bipartisan infrastructure by the fall, and inflation does not easily ebb, tougher choices will have to be made.
Salvaging the expanded child tax credit, which is estimated to nearly halve child poverty, becomes the most urgent domestic priority. But at $100 billion a year, slashing child poverty doesn’t come cheap. And there are only so many pots of $100 billion available.
To review: Biden’s corporate tax reform proposal brings in $166 billion per year (though Manchin has already leaned on Biden to scale it back). And Biden’s individual tax reform proposal brings in $100 billion per year.
Most individual tax rates will rise automatically in 2026 when Trump’s tax cuts are scheduled to expire, whereas Trump’s corporate tax cuts never expire. So there’s less urgency to expend political capital on individual tax rates when patience may do the trick. (If Democrats still hold the presidency after 2024, they may be able to execute another “fiscal cliff” maneuver, maintaining the middle-class tax cuts while letting those for the wealthy expire.)
But to undo the corporate tax cuts will likely require a partisan reconciliation bill. And extending the expanded child tax credit will also likely require a partisan reconciliation bill. There’s your perfect legislative match.