Yellen opens door to tax hikes

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 Wednesday before the Senate Banking Committee with the Biden administration considering up to $3 trillion in additional spending on infrastructure, green energy and education. The 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 has 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.”

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%.

Treasury Secretary Janet Yellen said her views on borrowing have changed in recent years.