US 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, AP

Yellen appeared Wednesday before the Senate Banking Committee with the Biden administration considering up to US$3 trillion in additional spending on infrastructure, green energy, and education. That “Build Back Better” plan would follow the US$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 percent of the U.S. economy’s output at the time. That ratio has since increased to slightly above 100 percent.

Responding to a question from Republican Senator Richard Shelby, 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 percent 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 US$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 percent, up from the current 21 percent, after the Trump administration cut it from 35 percent. Tax increases on higher-income Americans are also being considered.

Under questioning from Democrat Senator, Chris Van Hollen, 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 percent of Americans may be sheltering up to 20 percent 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.”

US Treasury Secretary Janet Yellen, says the government’s interest payments as a proportion of the economy are unchanged since 2007, when the debt was equal to just 35 percent of output.

Treasury Secretary Janet Yellen favors more borrowing, higher taxes