Image for Biden Budget Tips Off Debt Ceiling Battle
President Biden unveiled his budget proposal that expands social programs and raises taxes on the wealthy and large corporations.

Tax Proposals Target Wealthy and Large Corporations

As the clock ticks on raising the national debt limit, President Biden fired the first volley in the partisan battle over the federal budget deficit with a proposal to increase taxes on wealthy Americans and corporations.

Biden and his fellow Democrats know the proposal has no chance in the GOP-controlled House, which was quickly confirmed. Its purpose is to start the inevitable debate circling around the debt limit.

Biden’s proposal gives Republicans something to oppose while baiting them to offer their proposal. Other than agreeing to leave Medicare and Social Security off the negotiating table, congressional Republicans haven’t released their proposal to cut spending.

Biden’s proposal hues closely to what he signaled in his State of the Union address.

  • Requiring individuals and families worth more than $100 million to pay a 20 percent tax on income and unrealized gains of liquid assets such as stocks
  • Quadrupling the stock buyback tax
  • Rolling back tax cuts for high earners and raising the corporate income tax rate from 21 percent to 28 percent.
  • Raising the Medicare surtax on earned and unearned income above $400,000 from 3.8 percent to 5 percent.

Biden claims the tax measures in his proposed $6.8 trillion budget would generate $4.7 trillion in new revenue and reduce the federal budget deficit by $2.9 trillion over the next decade.

Republican House Speaker Kevin McCarthy met with Biden in early February to discuss the debt ceiling and the deficit. Afterward, McCarthy sounded an optimistic note. “The president and I had a good first meeting,” McCarthy told reporters. “I think at the end of the day, we can find common ground.”

House Republicans say they will unveil their budget plan later this month. Indications suggest they will propose gutting foreign aid and making cuts to health care, food assistance and housing programs. It’s likely the Republican proposal will be a for-show budget that couldn’t pass the Democratically controlled Senate and is intended, like Biden’s budget, as a marker to start serious negotiations.

Senate Republican Leader Mitch McConnell took the lead in responding to Biden’s proposals by saying tax increases would “never see the light of day” because of GOP control of the House. There was no immediate response from McCarthy. Expect something similar from Senate Majority Leader Chuck Schumer when the House budget plan is unveiled.

Assuming both parties lay down their markers by the end of March, that should leave less than three months to hammer out a compromise budget that allows a vote on the debt ceiling before early summer when Treasury Secretary Janet Yellen says the federal government won’t have the authority to pay all its bills.

The looming budget debate also has implications for the 2024 presidential election. Biden’s defense of domestic spending programs and a bump in military spending, paid in part by higher taxes on wealthy individuals and large corporations will be pitted against Republican calls for deep budget cuts and holding the line on tax hikes.

Meanwhile at the Federal Reserve
Federal Reserve Chair Jerome Powell spent two days on Capitol Hill, hinting more interest rate hikes will come as inflation fails to cool off. Although inflation has been moderating in recent months, the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy,” Powell said in prepared remarks.

“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell said. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”

His comments resulted in a sharp drop in the U.S. stock market, which had been leaning into smaller interest rate hikes.

Powell was asked about the debt ceiling, which he gingerly dodged. “These are really matters between the executive branch and Congress,” Powell said. “We do not seek to play a role in these policy issues, but at the end of the day there’s only one solution to this problem: Congress needs to raise the debt ceiling. That’s the only way out in a timely way that allows us to pay all of our bills.”

Questions posed Members of Congress included the impact of further interest rate hikes on employment, the financial stability of banks and the potential impact of lower occupancy rates in office buildings.

“The occupancy of office space in many major cities is remarkably low, and you wonder how that can be,” Powell said. “Over time, some of that’s going to be made into condominiums and things like that, since we don’t seem to have quite enough housing in some places, but the question is what’s the financial stability risk?”

Regarding jobs, Powell said the purpose of interest rate hikes isn’t “to put people out of work”. “We’re trying to restore price stability,” he said, adding that an increase in job openings could reflect the need to realign labor supply and demand.

Latest Job Market Report
The U.S. job market has remained strong despite inflation. New job market data will be released Friday showed a stronger-than-expected gain of 311,000 jobs in February. The unemployment rate ticked up to 3.6 percent, reflecting 400,000 people entering or re-entering the job market. Wages in February were only 0.2 percent higher than the previous month.

Sectors adding jobs included construction, health care, retail and professional and business services. The information sector lost 25,000 jobs. Employment was flat in manufacturing, transportation and warehousing.

The next Fed meeting is March 22.