Key Points
On a conventional scoring basis, PWBM estimates that, over the 2025-2034 budget window, President Biden’s FY2025 budget proposal would increase spending by $1.9 trillion and revenues by $3.6 trillion. It reduces primary deficits by the difference, equal to $1.7 trillion relative to current law.
Accounting for economic feedback effects, we project that GDP would fall by 0.8 percent in 2034 relative to current law along with a reduction in hours worked, capital and wages. By 2054, GDP falls by 1.3 percent and federal debt falls by 5.4 percent. Despite the reduction in debt, U.S. fiscal policy would remain unsustainable.
The President’s budget would redistribute resources from high-income earners to lower income earners. For example, we estimate that a 40-year-old in the bottom income quintile would be $36,400 better off, equivalent to a one-time transfer, under the President’s proposed budget, while a 20-year-old in the top income quintile would be $200 worse off. These results are different than indicated by conventional distributional analysis that fails to account for differences in ages, growth effects, reduced cost of debt service and other factors.
President Biden’s FY2025 Budget Proposal: Budgetary and Economic Effects
As in previous years and previous administrations, President Biden’s Fiscal Year 2025 budget contains some policy proposals that are specific in detail along with other proposals that are more aspiration with fewer details. Following a long-established scoring tradition, we follow a specific set of rules when analyzing specific proposals that vary in the details provided.
The President’s budget contains several major revenue provisions that are mostly focused on corporations and higher-income households:
- Increase the corporate income tax rate to 28 percent. Under current law, corporations pay a statutory tax rate of 21 percent on taxable income. This proposal would raise that rate to 28 percent. It would reverse one half of the corporate tax rate reduction enacted in 2017 as part of the Tax Cuts and Jobs Act, which lowered the rate from 35 percent to 21 percent.
- Increase the corporate alternative minimum tax (CAMT) rate to 21 percent. Under current law, larger corporations are subject to an alternative minimum tax based on their adjusted financial statement income (AFSI). The minimum tax equals 15 percent of AFSI, reduced by a modified version of the foreign tax credit. If this amount exceeds a corporation’s regular tax payments in a year, the difference must be paid as additional tax under the CAMT. The proposal would increase the CAMT rate applied to AFSI from 15 percent to 21 percent.
- Increase the excise tax rate on repurchase of corporate stock. Under current law, publicly traded corporations pay an excise tax when they repurchase their own stock from shareholders. The tax rate is 1 percent of the fair market value of the repurchased stock. This proposal would increase the excise tax rate on repurchases to 4 percent.1
Revise the global minimum tax regime. Under current law, U.S. shareholders’ income from their controlled foreign corporations (CFCs) is generally taxed under the global intangible low-taxed income (GILTI) regime. The GILTI regime imposes a tax rate on foreign income lower than the regular statutory rate, implemented by exempting a portion of that income from tax. Exemptions come from multiple sources: First, taxpayers may reduce their foreign taxable income by an amount equal to 10 percent of their qualified business asset investment (QBAI), which corresponds roughly to the value of their foreign tangible assets (such as structures and equipment). Second, taxpayers may deduct 50 percent of the remaining income, which results in an effective tax rate of one half the statutory tax rate.2 Taxpayers may also claim a foreign tax credit equal to 80 percent of the foreign taxes paid on their GILTI, which can be used to offset U.S. tax liability. If the foreign tax rate is high enough, the credit may completely offset any U.S. tax owed on GILTI.
Tax calculations are generally based on the U.S. taxpayer's foreign income that blends income, expenses, and foreign taxes from all the taxpayer’s CFCs regardless of which countries they are located. This means that taxpayers can use foreign taxes paid by CFCs in high-tax countries to offset U.S. tax liability on income from CFCs in low-tax countries.
The proposal would make several major changes to the GILTI regime. First, it would limit the blending of different CFCs’ income and taxes to within a single country (or “jurisdiction”), with a separate limitation on creditable foreign taxes in each country. This change is intended to prevent taxpayers from using taxes paid in one country to reduce their liability on GILTI arising from a low-tax country.
Second, it would eliminate the exclusion of 10 percent of QBAI from taxable income.
Third, it would reduce the deduction from 50 percent to 25 percent; in conjunction with a statutory corporate tax rate of 28 percent, it would raise the effective tax rate on GILTI to 21 percent.
Fourth, it would increase the portion of foreign taxes that may be claimed as a foreign tax credit from 80 percent to 95 percent and would allow unused credits to be carried forward for up to ten years (within the same country).3
- Apply a net investment income tax (NIIT) to pass-through business income of high-income taxpayers. Under current law, individuals with high wage or self-employment earnings are generally subject to a 0.9% additional Medicare payroll tax on top of the 2.9% Medicare payroll tax. Similarly, individuals with high investment earnings are subject to a 3.8% net investment income tax (NIIT). However, certain pass-through business income of limited partners and S corporation shareholders escapes both of those forms of high-income taxation. This policy would expand the NIIT base to ensure that all pass-through business income would be subject to the NIIT.
- Increase the net investment income tax (NIIT) and additional Medicare tax rate for high-income taxpayers. Under current law, taxpayers are subject to a 3.8% net investment income tax (NIIT) on investment earnings above $250,000 and a 0.9% additional Medicare tax (on top of the usual 2.9% Medicare payroll tax) on wage or self-employment earnings above $250,000 (both thresholds are for married filing jointly). This proposal would increase the additional Medicare tax rate on wages and self-employment earnings above $400,000 from 0.9% to 2.1%, bringing the total Medicare tax rate to 5%. It would also increase the NIIT rate for investment income above $400,000 from 3.8% to 5%.
- Increase the top marginal income tax rate for high-income earners. Under current law, in 2024 and 2025, the top marginal income tax rate is 37% and applies to income above $731,200 (for married filers). Also under current law, certain provisions of the TCJA are set to expire such that beginning in 2026, the top rate would increase to 39.6% and apply to income above $600,000 (for married filers). This policy would accelerate the return of the 39.6% rate to 2024 and apply the rate to income above $450,000 (for married filers). The policy would not affect the rates for any other bracket, which are scheduled to increase in 2026 under current law when the TCJA expires.
- Changes in capital income tax treatment. This policy would tax capital income for high-income earners with taxable income above $1 million at ordinary rates and treat transfers of appreciated property by gift or on death as realization events.
As shown in Table 1, PWBM projects that these provisions will increase revenues by $3.6 trillion over the 10-year budget window. These conventional estimates are projected on a “stacked basis” to capture interaction effects. So, for example, the provision to increase CAMT to 21 percent would capture more revenue if not combined with an increase in the corporate tax rate. The “Other revenue provisions” row combines smaller revenue items.
Missing from Table 1 is President’s “Billionaire Minimum Income Tax” that would levy a minimum income tax---where taxable income is redefined to be closer to financial statement income that includes unrealized gains---on households with more than $100 million in net worth. This provision was also included in previous Biden fiscal year budgets. But it lacks sufficient details---including basic definitions, how unrealized gains are valued, and the treatment of losses and credits across years---needed to provide meaningful analysis. Accordingly, both PWBM and the experts at the Joint Committee on Taxation have not scored this provision in previous budgets. Similarly, we will not score it for this fiscal year.4 We follow a well-established tradition of only scoring revenue when details are sufficient; otherwise, new revenue could be projected to reduce deficits without any material concomitant cost.
| 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | 2025-2034 | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenues | ||||||||||||
| Raise the corporate income tax rate to 28 percent | 65 | 91 | 98 | 106 | 108 | 109 | 110 | 115 | 115 | 119 | 122 | 1,093 |
| Increase the corporate alternative minimum tax (CAMT) rate to 21 percent | 7 | 9 | 8 | 8 | 8 | 9 | 9 | 9 | 10 | 10 | 11 | 92 |
| Increase the excise tax rate on repurchase of corporate stock | 3 | 10 | 10 | 10 | 11 | 12 | 13 | 14 | 16 | 17 | 18 | 129 |
| Revise the global minimum tax regime, limit inversions, and make related reforms | 13 | 35 | 25 | 28 | 29 | 30 | 31 | 33 | 34 | 35 | 36 | 317 |
| Apply net investment income tax to pass-through business income of high-income taxpayers | 0 | 25 | 26 | 27 | 28 | 29 | 31 | 32 | 34 | 35 | 37 | 304 |
| Increase net investment income tax rate and additional Medicare tax rate for high-income taxpayers | 7 | 23 | 24 | 25 | 26 | 28 | 29 | 31 | 32 | 34 | 36 | 288 |
| Increase the top marginal income tax rate for high-income earners | 38 | 51 | 23 | 9 | 10 | 10 | 11 | 11 | 12 | 12 | 13 | 162 |
| Changes in capital income tax treatment | 14 | 18 | 28 | 22 | 24 | 22 | 21 | 23 | 25 | 27 | 29 | 239 |
| Other revenue provisions | -6 | 42 | 88 | 68 | 69 | 76 | 111 | 121 | 134 | 137 | 143 | 989 |
| Total Revenues | 140 | 305 | 330 | 302 | 313 | 325 | 366 | 389 | 412 | 427 | 445 | 3,613 |
| Outlays | ||||||||||||
| Expand the child credit, and make permanent full refundability and advanceability | 2 | 94 | 92 | 5 | 6 | 5 | 5 | 5 | 5 | 5 | 5 | 227 |
| Restore and make permanent the American Rescue Plan expansion of the earned income tax credit for workers without qualifying children | 1 | 14 | 15 | 15 | 15 | 15 | 15 | 15 | 15 | 15 | 15 | 150 |
| Make permanent the Inflation Reduction Act expansion of health insurance premium tax credits | 0 | 0 | 2 | 22 | 23 | 25 | 27 | 29 | 31 | 33 | 35 | 226 |
| Other spending provisions | 61 | 89 | 167 | 142 | 155 | 139 | 179 | 141 | 137 | 68 | 74 | 1,291 |
| Total Outlays | 64 | 198 | 276 | 184 | 199 | 185 | 226 | 190 | 188 | 121 | 129 | 1,895 |
| Primary Deficit (-) or Surplus | 76 | 107 | 55 | 118 | 114 | 140 | 140 | 199 | 224 | 306 | 315 | 1,718 |
The President’s budget contains several spending provisions as well:
Expanding the Child Tax Credit. For taxable years beginning after December 31, 2023, and ending before January 1, 2026, this policy would increase the maximum credit per child to $3,600 for qualifying children under age 6 and to $3,000 for all other qualifying children; phase out the portion of the credit in excess of $2,000 with income in excess of $150,000 of modified AGI for married joint filers or surviving spouses, $112,500 for head of household filers, and $75,000 for all other filers; and increase the maximum age to qualify for the CTC from 16 to 17. In addition, for taxable years beginning after December 31, 2023, this policy would make the Child Tax Credit fully refundable, regardless of earned income.
Making permanent the Earned Income Tax Credit expansion for workers not raising children in their homes. Under current law, childless workers receive an earned income tax credit (EITC) that phases in at 7.65% over the first $8,260 of earnings, reaches a maximum credit amount of $632, and then phases out at 7.65% beyond earnings of $10,330 (for single filers). The EITC is fully phased out when earnings reach $18,590 (for single filers). This policy would adjust the EITC for childless workers so that it would phase in at 15.30% over the first $11,430 of earnings, reach a maximum credit amount of $1,749, and then phase out at a rate of 15.3% beyond earnings of $13,510 (for single filers). The EITC would be fully phased out when earnings reach $24,940 (for single filers).
Permanently extend enhanced premium tax credits. This policy would make permanent the decrease in the contribution percentages of household income used for determining the premium tax credit in the ACA, as previously enacted in the American Rescue Plan (ARP) and the inflation reduction act (IRA). The policy would set the required contribution to ACA plan health insurance costs to zero for individuals making less than 150 percent of the federal poverty line (FPL), then between 0 and 2 percent for individuals between 150 and 200 percent of the FPL, 2 to 4 percent for individuals with income between 200 and 250 percent of FPL, 4 to 6 percent for individuals with income between 250 and 300 percent of FPL, 6 to 8.5 percent for individuals with income between 300 and 400 percent of FPL, and 8.5 percent for individuals with income higher than 400 percent of FPL line.
As in previous budgets and previous administrations, many outlay (spending) provisions in the Biden budget contain “placeholders” with “rounded” budget numbers. When enough detail is provided, we have produced our own estimates, as shown above. For “Other spending programs”, we have taken the President’s budget placeholders as given but made some adjustments for differences in economic growth projects between PWBM and the administration.
As shown in Table 1, we estimate total outlays as $1,895 billion over the 10-year budget window. When subtracted from total revenue, these changes produce a primary surplus of $1,718 billion relative to current law. However, current law already contains large budget deficits, with debt increasing from around 100 percent of GDP today to 123 percent of GDP by 2034, at end of the 10-year budget window. As reported in Table 2 below, debt in 2034 would be 2 percent lower relative to current law, but President Biden’s budget would not eliminate growing budget deficits.
Table 2 shows the estimated effects on various macroeconomic aggregates of the President’s budget. By the end of the budget period, in 2034, GDP declines by 0.8 percent relative to current law, the capital stock is 1.5 percent lower, average hours worked fall by 0.7 percent, and the average wage falls by 0.2. Including these economic feedback effects, federal debt falls by 2.0 in 2034.
By 2034, consumption rises by 0.2 percent, in part, due to transfers to lower-income households with higher marginal propensities to consume. The increase in consumption in the presence of falling budget deficits is another example of how budget deficits alone are not a “sufficient statistic” for the impact of federal policy on consumption, as the actual composition of federal spending also matters.5 In the Biden budget, low and middle-income households benefit from lower taxes because of increases to the child tax credit, the earned income tax credit, and the ACA premium tax credits, some of which are refundable. As such, the Biden budget would be slightly inflationary in nature over the next decade but not enough to have a material impact on the reported inflation rate.
Over the longer term, debt falls even more but disincentives to work lower GDP and the capital stock further. By 2054, GDP is 1.3 percent lower than under current law, with capital being 2.4 percent lower and hours worked 0.8 percent lower. With wages falling by 0.6 percent, consumption falls by 0.5 percent. Federal debt falls by 5.4 percent. However, the reduction in federal debt is not enough to prevent it from continuing to grow unbounded over time, reaching over 200 percent by 2054.6
| 2034 | 2039 | 2044 | 2049 | 2054 | |
|---|---|---|---|---|---|
| Gross domestic product | -0.8 | -1.0 | -1.1 | -1.2 | -1.3 |
| Capital stock | -1.4 | -1.6 | -1.9 | -2.1 | -2.4 |
| Hours worked | -0.7 | -0.7 | -0.6 | -0.7 | -0.8 |
| Average wage | -0.2 | -0.3 | -0.4 | -0.5 | -0.6 |
| Consumption | 0.2 | 0.0 | -0.2 | -0.3 | -0.5 |
| Debt held by the public | -2.0 | -3.5 | -4.4 | -5.1 | -5.4 |
As noted above, low and middle-income households benefit from lower taxes because of increases to the child tax credit, the earned income tax credit, and the ACA premium tax credits, some of which are refundable. Higher-income earners face higher taxes that were specifically designed to raise revenues from top earners and the wealthy (see Table 1).
| Income group | 2025 | 2034 | ||
|---|---|---|---|---|
| Average income change, after taxes and transfers | Percent change in income, after taxes and transfers | Average income change, after taxes and transfers | Percent change in income, after taxes and transfers | |
| First quintile | 1,785 | 15.4% | 360 | 4.5% |
| Second quintile | 1,295 | 2.9% | 195 | 0.3% |
| Middle quintile | 1,065 | 1.4% | 410 | 0.4% |
| Fourth quintile | 955 | 0.7% | 260 | 0.2% |
| 80-90% | 95 | 0.1% | -240 | -0.1% |
| 90-95% | -720 | -0.2% | -970 | -0.2% |
| 95-99% | -6,955 | -1.0% | -8,655 | -1.0% |
| 99-99.9% | -82,845 | -4.2% | -84,780 | -3.4% |
| Top 0.1% | -1,579,270 | -9.6% | -1,667,250 | -7.7% |
Table 3 presents “conventional” distributional analysis that shows how the President’s proposals would affect the average income, after taxes and transfers, of households by income quintile on an annual basis. Like JCT, PWBM assigns some of the increase in corporate tax rates as a reduction in wages paid to all households, which is captured Table 3.7
The President’s Budget increases the income of all households in the bottom four quintiles, with an average increase of almost $1,300 in 2025 and an increase of about $1,800 for the bottom quintile. Average income decreases for the top 10 percent of households by income, which ranges from a decrease of $720 for households in the 90th to 95th percentile range to over $82,000 in the top 1 percent, with even greater losses for the top 0.1 percent. By 2034, the gains in the bottom four quintiles are smaller while the losses for the top 10 percent grow.
Table 4 shows PWBM’s dynamic distributional analysis using its dynamic model for the proposal. Dynamic distributional analysis considers households across the income and age distribution, including the unborn represented by a negative age index at the time of the reform. It asks how much each household, categorized by income and age, values the proposed policy change over their entire lifetime, represented as a one-time transfer at the time of the policy change.8 A positive value in Table 4 means that the household would be better off under the policy reform by the amount shown; a negative value means that the household would be worse off under the policy reform. Dynamic distributional analysis is the standard in academic research, where conventional analysis is rarely used due to several key limitations that dynamic analysis addresses.
Table 4 shows that the President’s budget proposal increases the lifetime wellbeing of the currently alive lower- to middle- income households. But it also increases the wellbeing of future generations, including those with higher income, relative to current law.
The increase in future wellbeing might be surprising given the reduction in economic activity over time. The main driver of this result is that dynamic analysis, unlike conventional analysis, recognizes that current law is not sustainable over time in the presence of forward-looking capital market participants. To “close” the dynamic model, PWBM assumes a “closure rule” taking the form of a tax on consumption not including medical insurance premiums or medical expenses.9 As a result, future generations gain from a reduction in this consumption tax. These gains represent a one-time increase of about one to three months of income for most households born in the future, when accounting for economic growth over time.10
This analysis was conducted by Alex Arnon, Kody Carmody, Jon Huntley, Ed Murphy, Brendan Novak, and Felix Reichling under the direction of Kent Smetters. Felix Reichling wrote this brief with guidance from Kent Smetters. Mariko Paulson prepared the brief for the website.
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The proposal also extends the excise tax to cover purchases of certain foreign corporations’ stock by their own foreign affiliates; PWBM did not model this element of the proposal. ↩
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Under current law, the deduction will fall from 50 percent to 37.5 percent after 2025. ↩
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In addition to the policies listed above, the proposal would allow net operating losses to be carried forward and would repeal the high-tax exemption for Subpart F and GILTI. The proposal would also make several smaller changes to the taxation of foreign income, which PWBM did not explicitly model. ↩
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Lacking sufficient details, the potential impacts of this provision on the economy are unclear due to competing effects. The President’s budget projects that this provision would produce $503 billion in new revenue over the 10-year budget window. If taken as given, this revenue would lower federal debt to crowd in capital. At the same time, capital formation could decline in the presence of liquidity issues associated with taxing unrealized gains as well as distortions to entrepreneurial activity and business formation. ↩
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Similar, PWBM found that the Inflation Reduction Act (IRA) would have little impact on inflation despite a reduction in projected deficits. (After U.S. Treasury interpretation guidance was provided after the IRA was passed, PWBM updated its costs estimate. As a result, the IRA is now projected to increase budget deficits.) ↩
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Previous PWBM analysis estimates that federal debt of 190 percent of GDP is likely the upper bound before U.S. government must either implicitly (using “surprise” inflation) or explicitly default on its debt obligations. ↩
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In the presence of adjustment costs, PWBM estimates a wage incidence that varies from 0 percent in 2025 and increases to 25 percent by year 2034. Wage incidence adjustments are naturally ad hoc in nature for new policy but follow a past empirical literature (which is not always a good guide for new policy) and a practice by JCT. ↩
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For the unborn, the transfer is calculated to be received at their first year of working age, not in present value. ↩
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Importantly, a closure rule is not part of current law and itself reflects the lack of sustainability of current law. ↩
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Table 4 sorts households by their income group immediately prior to the policy change. However, in the presence of lifecycle (age) effects, households move between income groups over their lifetime, typically increasing with age followed by decreasing with age (especially in retirement). Household income also varies based on direct income shocks and medical cost shocks that impact future ability to earn income. ↩
Age 0 to 20 20 to 40 40 to 60 60 to 80 80 to 100 -20 28800 21600 26600 30600 30400 -10 24200 14200 16900 15700 7300 0 20100 11100 12500 9400 -300 10 17700 9600 10700 7900 -500 20 16100 10400 11800 10600 -200 30 29900 22800 21900 24400 18200 40 36400 33100 30700 33900 43500 50 17900 27900 28300 39400 54800 60 6300 11700 13700 11900 -3200 70 300 -200 2300 1000 -35200 80 1100 0 1300 200 -21500