Yellen sees room for U.S. to borrow, opens door to tax hike

WASHINGTON — Treasury Secretary Janet Yellen believes the U.S. government has more room to borrow, but said higher taxes would likely be required in the long run to finance future spending increases.

Yellen appeared today before the Senate Banking Committee with the Biden administration considering up to $3 trillion in additional spending on infrastructure, green energy and education. That “Build Back Better” plan would follow the $1.9 trillion economic relief package approved earlier this month.

Yellen said her views on borrowing have changed since 2017, when she expressed concerns about a federal debt that was equal to about 75% of the U.S. economy’s output at the time. That ratio has since increased to slightly above 100%.

Responding to a question from Sen. Richard Shelby, R-Ala., Yellen said the persistence of low interest rates have changed her views on federal debt. Lower rates have made it easier for the federal government to cover the interest costs on the debt, she said. In fact, the government’s interest payments as a proportion of the economy are unchanged since 2007, when the debt was equal to just 35% of output, Yellen said.

“I think that’s a more meaningful metric of the burden of the debt on society and on the federal finances,” she said. “And so I do believe we have more fiscal space, but it certainly doesn’t mean that anything goes.”

Yellen said that she supports borrowing to finance the $1.9 trillion aid package because it is temporary spending in response to a crisis.

“But longer run, we do have to raise revenue to support permanent spending,” she said.

The Biden administration is considering a bump in the corporate tax rate to 28%, up from the current 21%, after the Trump administration cut it from 35%. Tax increases on higher-income Americans are being considered.

Yellen and Federal Reserve Chair Jerome Powell testified for a second day before a congressional panel, as part of congressional oversight of last year’s $2 trillion emergency aid package.

Powell reiterated that the recent jump in the yield on the 10-year Treasury, which soared from less than 1% at the beginning of the year to 1.6% Wednesday, was mostly a sign of confidence among investors that the economy is improving.

“That has been an orderly process,” he said. “I would be concerned if it were not an orderly process” or if rates went high enough to limit borrowing and spending and slow the economy.

Under questioning from Sen. Chris Van Hollen, D-Md., Yellen said Congress should allot more money to the IRS so the tax collection agency could reduce tax evasion. The amount of uncollected taxes is referred to as the “tax gap” and the issue received more attention this week after the release of research showing that the richest 1% of Americans may be sheltering up to 20% of their income from taxation.

“The tax gap is huge,” Yellen said, “and I think we would have a fairer tax system and collect more tax revenue without the need to raise (tax) rates if we resourced the IRS properly.”