More Than Zero: The Real Cost of Building Back Better

I n advertising his Build Back Better plan to the public, President Biden has asserted that the proposal costs zero. The argument is that the agenda would not increase government debt; rather, it would be paid for by increased taxation on “big corporations” and “those at the top.” While that line has received deserved criticism in recent weeks, howling about economic illiteracy, however satisfying, is a poor place to end the conversation. Indeed, the massive expansion of government that has occurred since the pandemic began will have very large long-run costs, which must be weighed carefully and seriously. In a rational policy debate, a careful review of our fiscal situation should be a prerequisite for any consideration of new spending.

The numbers will not be invited to a beauty contest anytime soon. In the halcyon days of 2019, government debt by the public was a bracing $16.8 trillion. As COVID-19 hit our shores, the government ran a deficit just north of $3 trillion in both 2020 and 2021. The 2022 budget year is still being settled by a Congress in disarray, but it seems safe to assume that the deficit in 2022 will be close to $3 trillion as well. Altogether, that means that by the end of 2022, U.S. government debt held by the public will have climbed to about $26 trillion — or about $79,000 for each American. To look at it on the margin, the bill for dealing with the pandemic is going to be about $10 trillion — the difference between what we owe now and where we were just before the pandemic.

With numbers so large, it is easy to zone out and think of it as just funny money. But there is a fiscal reality that is taught in economics classrooms around the world. If the government spends $1 on something, it could finance it by raising $1 in taxes. If it borrows the $1 instead, it will have to raise taxes in the future to pay the $1 back. If it simply pays the interest on that debt every year, taxes will have to be raised to pay that interest, and over time, that too will be like paying the $1 back.

So the best way to think about the new $10 trillion or so in government debt is that, in theory, each American citizen will have to pay $30,000 in taxes to pay the bill. But the cost of the policies does not end there.

Suppose you purchase an apple for $1. If the enjoyment you get from eating the apple is worth just $1 to you, then you are in effect indifferent about the purchase. Yet more likely than not — especially if you are hungry — the happiness you gain from buying the apple is worth more than $1 to you. Perhaps you get $3 of happiness for each apple consumed. Now suppose that the government takes $1 away from you to cover its COVID-19-relief spending. You not only lose the $1 but you also lose the extra $2 in happiness that the apple used to give you. To put it in technical terms, when the government raises $1, the true cost to society is higher than the dollar because of the lost surplus happiness. The lost happiness is referred to as “deadweight loss.”

The notion of deadweight loss is an attempt to include opportunity cost when measuring the “real” cost of taxation. Those can be psychological — e.g., the lost happiness from the exchanges that do not happen — but they can be more conventionally “economic.” Thus, if higher taxes depress business activity, there’s a cost to that cannot be wished away, and it’s a cost that is not just paid by those on whom the tax is levied. Under the circumstances, for the president to claim that the cost of a program financed by taxes on a politically palatable someone else is “$0” is to ignore the reality that taxes too trickle down.

There is vast literature on estimating the true cost of raising a dollar of taxation, but an extremely accessible review was authored by Duke University’s Christopher Conover, and published by the Cato Institute in 2010. Conover found that the literature suggests that an extra dollar in income-tax revenue costs an additional 50 cents in deadweight loss. The literature found that some taxes are associated with much higher marginal social harm than others, with $1 in property taxes creating an extra burden of just 17.6 cents, while an extra $1 of capital taxes costing society an additional $1.02 in harm.

Moving beyond the Build Back Better debate: All told, the real future cost in terms of higher taxes and deadweight loss of the pandemic relief will be about $15 trillion — or about $45,000 for every man, women, or child in society today. If we assume that only the 144 million people who pay taxes shall cover this burden, then the cost rises to $104,000 per person.

The money is spent, out the door. At some point, you or your children are going to have to foot that bill. And the next time that President Biden asserts that his plan is costless, think of that apple, and remind him that if we raise enough tax to cover the spending today, the economic harm from higher taxation is about 50 percent of the revenue. Whatever the spending plan, and whether it’s paid today or sometime in the future, the cost to society as a whole increases the bill — if it is honestly calculated — by about a half.