Biden’s Toughest Challenges: Public Finance, Defense Spending, and Corporate Tax

Georges Ugeux
5 min readOct 28, 2020

Sometimes, in a presidential debate, the most important part is what is not addressed. One of them is the fragile state of our public finance, fueled by failed war efforts, favorable taxes for large corporations and wealthy individuals, aberrant defense spending, and absurd investments like the “Mexican Wall”.

Source: The Washington Post

A quick look at the past

Ever since Bill Clinton managed to balance the federal budget, both Republican and Democrat administrations have largely deployed expenses that could only be funded by debt. The Trump administration is no exception to this rule, even though it was not facing a need to increase the budget deficit until the pandemic coronavirus.

According to the Committee for a Responsible Federal Budget, the “federal debt could grow even higher than projected. If policymakers enact $1 trillion of additional fiscal relief, extend expiring tax provisions, and increase appropriations with the economy, debt will reach 121% of GDP by 2030".

The Federal Reserve used all its ammunition in one six-week shot and financed the entire $3 trillion stimulus. It was spending as much as it did during the three Quantitative Easing of the past ten years increasing its balance sheet by 40%.

Decrease military expenses

Source: Peterson Foundation
  • The US budget is composed roughly of 75% in existing commitments, and one quarter in discretionary expenses (not including emergency expenses like the recent stimulus package). In the 2020 budget, half of the discretionary budget was going to defense. The numbers are staggering. This is the sacred cow of the US budget. The excuse that the US must catch up with Russia or China does not hold.
  • The narrative about the military has made it impossible to even look at these expenses: one-third of it is paid in salaries, while the other two-thirds go to the defense industry. This taboo must be broken, and the audit of defense expenses, the collusion between the politicians and the industry must be reviewed. This is not about our “men and women in uniform” it is about enhancing the profits of the defense industry.
  • The gluttony of the defense industry is unbearable. The United States is home to five of the world’s 10 largest defense contractors, and American companies account for 57% of total arms sales by the world’s 100 largest defense contractors.

About 15% of all U.S. federal spending, and 50% of the U.S discretionary spending goes to the military. Getting rid of this discretionary military expense would release half a trillion dollars to fund socially helpful initiatives.

  • Under Trump’s administration, one would not be surprised to see that defense company Lockheed Martin’s stock price increased by 80% while its dividend increased by 20% since 2019.

Cost of the debt

The cost of the debt is the consequence of the explosion of the US federal debt to more than $25 trillion. The US Treasury owes a debt of gratitude to the Federal reserve for having reduced its cost of financing close to 0%. The yield on US Treasury bonds reaches 1% on 20-year bonds. In a marvelous display of solidarity, the Fed announced that interest rates would not change for the next three years: not only is this announcement exceptionally dangerous for financial stability (unless the Fed has a crystal ball on the next years of recession, a continuation of the global pandemic, unemployment, and consumer spending) it is also an expropriation of the revenues of the retirees’ pension funds and life insurance companies. At an average rate of 2%, the federal debt costs half a trillion and growing. The debt must decrease.

Investment in alternative energies to curb global warming is a refreshing message and so is the message that subsidies to the oil industry will be cut. The question, however, is the sustainability of those expenses: the Biden number is $750 billion over ten years. In the grandiose scheme of things, it is not a huge amount to create new quality jobs and clean the pollution. But why does it need to be a government expense? The energy industry is capable of making such investments. Exxon Mobil pays approximately $15 billion in dividends for the same amount of profits: this is where subsidies go. Not in investment. The energy industry does not need any form of subsidies.

The government's revenues must increase

Let’s put the record straight on taxation. While the wealthiest can escape taxes as Donald Trump did by paying $ 750 in the last two years, the average citizen bears the burden of the budget. But the biggest scandal is the corporate income tax.

Large corporates must contribute more than 7% to the budget.

  • As the table below demonstrates, the large companies managed to become basically tax-free. According to Harvard Business School, for a long time now, digital giants such as Google, Apple, Facebook, and Amazon (GAFA) have found innovative ways to reduce tax payments to foreign governments, a possible factor in foreign governments’ lowered tax collections. 50% of the taxes come from personal income tax while 7% comes from corporate income tax. It is a scandal that must stop.
Source: Tax policy center
  • The corporate world must pay corporate taxes commensurate to their ability to benefit from the infrastructure they enjoy and use in the country. The taxation on profits has become a cat and mouse game. I remember a conversation in Paris with the chief tax officer of a large company. He told me that he was proud not to pay taxes, thanks to his 700 tax experts in the company. Small companies have no escape. Large multinationals manage to keep their profits abroad in tax havens (God save Ireland) and not be taxed in the US. It is time to look at a minimum tax rate on revenue or a profit tax whichever is the highest. From 55% of the budget, households now represent 80%.

The impact of tax increase does not affect the real economy.

It affects the stock price and dividends. Today, shareholders make a fortune when at the same time people see their income cut by the Federal Reserve. The S&P 500 return is completely disconnected from corporate earnings thanks to the Federal Reserve.

Source: First Tuesday

The challenges are huge, but the discrepancies are so large that Joe Biden has a unique ability to act decisively to rebalance the allocation of prosperity. He will need to act on both expenses and revenues. Any advantage to large companies and wealthy individuals is not increasing consumption and is not an engine of growth. Let the private sector lick its wounds and the public sector help those who deserve it.

It is time to take inequality at its roots.



Georges Ugeux

CEO at Galileo Global Advisors and Adjunct professor Columbia Law School.